The FDIC's long game
As anyone who’s ever dealt with an insurance company knows: They like to minimize the amount they have to pay out in claims. The FDIC is no normal insurance company — but its actions last weekend are entirely consistent with a desire to save as much money as possible.
Why it matters: The FDIC on Sunday decided to bail out a set of Silicon Valley millionaires and billionaires who had substantial uninsured deposits at Silicon Valley Bank. That's great for the plutocrats in question — but it also turns out to be great for everyday Americans who pay through various bank fees for the FDIC insurance fund.
How it works: As depositors across the country watched SVB depositors bewailing their putative losses, they started to worry about their own money.
- Roughly half of all bank deposits are uninsured, and of those uninsured deposits, only about $1.1 trillion is housed at the giant too-big-to-fail institutions known as G-SIBs. (That stands for global systemically important banks.)
- That leaves some $1.5 trillion of uninsured deposits across the country, most of which are earning an underwhelming rate of interest.
- To put that number in context: A bank run of $0.04 trillion at SVB was historically unprecedented and managed to wipe out the 16th-largest bank in the country within the space of 24 hours.
Between the lines: Now that it's possible to get a 5% rate of interest just by keeping your money in Treasury bills, greed alone is enough to get Americans to move billions of dollars out of deposit accounts. If you add to that the fear that their bank might not be good for the money, the current flow of money out of low-interest accounts could overnight become a tsunami.
- In his annual letter this week, BlackRock CEO Larry Fink warned of the possibility of "more seizures and shutdowns" in a re-run of the S&L crisis of the 1980s.
By the numbers: An important new paper sketches out the possible losses to the FDIC were Americans to start panicking and transferring their uninsured deposits out of regional banks.
- If half of uninsured deposits join a bank run, the authors estimate that 186 banks would fail, with close to 100% losses for uninsured depositors who didn't get their money out in time. "In other words," they write, "the decision to run would have been a rational one."
- The cost to the FDIC, even paying nothing to uninsured depositors, would be at least $10 billion and almost certainly much more, given the plunge in bond prices that would accompany simultaneous forced selling from hundreds of banks trying to meet redemption requests.
Where it stands: By guaranteeing all of the uninsured deposits in SVB, the FDIC ensured that most of those depositors no longer felt any need to withdraw their money.
- The total cost to the FDIC of backstopping all deposits at both SVB and Signature Bank is not yet known, but it's almost certainly going to end up being smaller than the cost to the FDIC of multiple bank runs across the country — which was the alternative.
The bottom line: If this was a bailout, it was a selfish one on the part of the FDIC. Not to mention the fact that by massively reducing the risk of simultaneous bank runs at hundreds of banks around the country, it quite possibly prevented a full-blown banking crisis.