With the recent crisis involving regional banks, there has been some discussion over the $250,000 coverage by the FDIC and if it is enough. Senator Elizabeth Warren is at the forefront of this discussion and believes we should look to increase the coverage provided by the FDIC. Warren is blaming the Federal Reserve, the Trump administration, and financial regulators for the crisis as she believes they laid the groundwork which made the situation possible. She specifically said that Jerome Powell "took a flamethrower" to banking regulations.
The government created this situation by coming out and saying that everybody who is a client of Silicon Valley Bank will be made whole, even if they are above the $250,000 threshold. By doing this, for every bank that fails from now on clients of said bank would point to SVB and say "If they were all made whole we should be too." Another conversation that ensues from limiting the coverage is how much will the level be raised, and also where would this money come from.
Wealthy people or companies who have more than $250,000 in a bank would try their best to make sure the bank they choose is safe so that they wouldn't lose their excess money. This in turn may make banks take on less risk so that wealthier people will bank with them, thus resulting in more deposits and ways to make the bank money. If the FDIC increases their insurance level, the risk banks take may increase as more people have over $250,000 than people who have $5 million for example. This may have an inverse effect where the FDIC will have to bail out more banks than they do currently.
https://www.bostonglobe.com/2023/03/20/business/senator-warren-says-she-favors-increasing-fdics-deposit-insurance-cap/
3 comments:
Great post! I agree that the $250,000 threshold is too low, but again the FED cannot continue bailing banks out and printing money out of thin air. Reserve requirements should be significantly higher and this whole issue is a result of fractional reserve banking. The fact banks do not have liquidity is incredibly concerning. This issue combined with no asset like gold to limit money printing is what makes me believe our currency and a majority of banks are failures.
Hello Vincent,
Silicon Valley Bank would indeed take on more risk if they increase their insurance to up to $250,000. However, it makes many customers feel safer when looking to put their assets in the bank. Additionally, SVB just merged to create a net value of many billions of dollars. So although they are taking risks by increasing their insurance, they do have money in their back pockets to afford some overflow.
Overall, great post. Well done.
Good post! I also agree that the threshold of $250000 is very low but also printing money is not the right move to do. Maybe increasing the reserve requirements will help. This issue is very concerning as banks are facing liquidity issues as the whole economy is going through a rough patch. If not dealt with this in time, it can lead to a disastrous failure of the banking system leading to an economic crisis.
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