Two Big Ideas for Preventing Another Banking Crisis

Mr. Hockett and others argue that insuring all deposits could improve the banking system. They say it wouldn’t introduce moral hazard, because putting deposits at risk is not what keeps banks in check. Instead, what’s supposed to keep bankers from acting too recklessly is the knowledge that if their bank fails, shareholders and bondholders will be wiped out, executives will be investigated and, in many cases, the government will try to claw back compensation.

Deposit insurance has long been funded by the banks themselves. Since 2005, their contributions have been “risk-priced,” meaning the more risk a bank takes, the higher the premiums it pays. Larger banks pay more than smaller banks. Mr. Hockett’s scheme would obviously require larger contributions — and tighter regulations — but he envisions a similar tiered system. He also envisions a return of measures like stress tests, which Congress eliminated for midsize banks during the Trump administration.

Explicitly insuring all deposits, Mr. Hockett says, could prevent a run on a troubled bank, because customers would know ahead of time that their money was safe. It could also help preserve small and midsize banks. Although SVB plainly mismanaged its risk, the bank catered to a sector it understood well: venture capitalists and start-ups. Its loan portfolio was not the problem. Other smaller banks also specialize in particular sectors and are willing to make loans that the big behemoths might not be. That needs to be encouraged, Mr. Hockett says.

Not everyone thinks deposits should be free of risk. Sheila Bair, who was the chair of the F.D.I.C. during the financial crisis, practically groaned when I brought up the idea of insuring all deposits.

“These were big tech companies like Roku whining and crying about their uninsured deposits,” she said. “If a $200 billion bank can bring down the banking system, then we don’t have a stable, resilient system.”

Article source: https://www.nytimes.com/2023/03/18/business/dealbook/banking-crisis-svb.html