The series of events that have occurred over the past few weeks have been unfortunate and we begin this week with the loss of another highly regarded financial institution. Given this, depositors are needing assurance and banks are looking at ways to move forward and help restore confidence in the banking system.
The Federal Deposit Insurance Corporation also released a report today in response to the recent failures. It examines the role of deposit insurance in promoting financial stability and preventing bank runs, as well as policies and tools that may complement changes to deposit insurance coverage.
Banks provide the plumbing that makes the financial systems in our economy function. When seen through that lens, it becomes clear that the plumbing system is what needs to be insured. This would provide stability and confidence to businesses of all sizes and shapes and would promote a more level playing field across the enviable multi-sized financial system here in the U.S.
We currently have a system of insured deposits up to a dollar limit of $250,000 per signer or entity with a variety of ways to provide additional coverage, some of which are synthetically created. All other deposits remain uninsured.
Much of the recent focus of many banks has been the ratio of uninsured deposits, which are largely held by business accounts. After the recent failures, we saw a narrative that led consumers and businesses to believe that their funds should be split up across multiple entities or that their money is safer in the largest institutions, which ultimately, reinforces the too-big-to-fail structure. The small and regional banks responded with the use of a reciprocal deposit product, which essentially utilizes an intermediary to extend deposit insurance. Just pull up any recent bank earnings report and you’ll see the change in their insured deposit ratio.
Next, and most unfortunate, is that these events have led to a loss of confidence in the industry. We saw bank runs occur in small compressed windows of time due to the ability to distribute information in real-time, along with the faster movement of money. We’ve seen similar impacts at other banks, with several regional banks experiencing massive deposit losses.
In order to restore confidence, some in the industry have begun a new narrative, looking for full FDIC coverage of deposits. This response is the pendulum swinging from one extreme to the other. While that may lead to a short-term calm, it sets the framework for a series of longer-term challenges, and makes way for potentially reckless competitors.
A small business owner fuels the local economy every day. From the team they employ to the vendors they pay, and the services provided. As they grow, so does the financial impact on the economy. Those that leverage banking services for their day-to-day operations – whether it’s paying bills or making payroll, should never doubt that the financial system is in jeopardy.
For most of these businesses, their average balances are over $250,000. I believe that we need a split system. On one end, the funds that support the day-to-day function of a business, often called an operating account, are fully guaranteed. A business owner, who leverages core banking services in their day-to-day should have piece-of-mind and worry-free deposits as it pertains to their operating accounts.
If a business has extra funds and chooses to move those to an interest-bearing account, then, there is a risk that can be taken to gain a return, just like with any other investment.
Currently, the frenzy is leading to a set of divergent views on this topic. It’s important to keep in mind the core component of the banking industry and work through a solution that supports those core tenants. The American economy’s strength comes from the diversity of its free market system, which has been supported by banks of all sizes. A bank failure should not cause panic in the entire system. Ultimately, we need a solution that supports and powers our plumbing.
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