(Spencer Platt/Getty Images North America/Getty Images)
The failure of three US regional banks nearly a year ago caused chaos in the financial world. Regulators and other banks had to work quickly to stop the situation from progressing.
Now, investors are worried again. New York Community Bancorp's stock has fallen about 57% in the past two weeks, largely because of fears that the bank is losing money from loans related to commercial real estate.
Another source of fear is the uninsured deposits at the bank, because accounts with more than $250,000 are not protected if the bank fails. If depositors think the bail might fail, they could withdraw their money, causing a run.
At Silicon Valley Bank, 94% of the deposits were uninsured. At Signature Bank, it was 90%. New York Community Bank is a bit different, with about 40% of its deposits being uninsured.
But after seeing several regional banks fail last year, it's worth asking why people still keep their money in a bank without insurance and what the ramifications could be.
Before the Bell spoke with Lawrence White, an economist and professor at New York University's Stern School of Business, to discuss why uninsured bank accounts are so problematic.
You can also check out our longer explainer on the situation here.
This interview has been edited for length and clarity.
Before the Bell: Why would anyone have more than $250,000 in a bank account?
Lawrence White: That's a large question. An $8 trillion question.
Is that how much money is uninsured in US bank accounts?
About 40% of the overall level of deposits are uninsured, and as of the end of the third quarter last year, there was $18.6 trillion in aggregate deposits in US banks. So 40% of that is about $7.5 trillion.
That's a lot of money to lose.
So back to your fundamental question. There's one part of the question that is easy to answer. Business enterprises need transaction accounts. In order to meet payroll and in order to pay suppliers, they need to have money in the bank against which they can write checks. The basic deposit insurance amount is $250,000 in any bank, and you don't need to be a very large enterprise to think 'I need more than $250,000 in order to meet my needs.'
That's the easy part to explain. The second part of your question is why do individuals have more than $250,000 in any given bank? Let's remember if I have $250,000 in the XYZ bank, and $250,000 separately in the ABC bank, both of those are covered. The insurance is per account, per bank.
But as we learned with Silicon Valley Bank and Signature and First Republic, there are lots of individuals who have uninsured deposits. And I gotta tell you, I don't get it.
For businesses it's understandable, but still problematic from a bank stability purpose.
I'm a believer in complete coverage, which puts more burden on the regulators to be doing what they ought to be doing anyway, regulating banks so that they operate on a more safe and sound basis.
But even if you don't believe in 100% deposit insurance, they can do something to deal with the fragility of having uninsured deposits, especially in the year 2024, when communication among nervous individuals is fast-paced. We can't live with that kind of fragility.
Is this a growing problem?
About 40% of deposits are uninsured system-wide. That means there are some banks above that and some banks below. The 40% number itself is substantially larger than 30 years ago, in the early 1990s. The overall aggregate was only 20% then. So having 40% rather than 20% is a big change. I hadn't realized that things had changed so much until the aftermath of Silicon Valley Bank.
When people pull their money out from regional banks, where do they put it?
It doesn't go under their pillow. It goes to Chase or Citi or Wells Fargo or Bank of America. Banks that are too big to fail and unlikely to get into the same kinds of difficulties that a Signature or Silicon Valley Bank or First Republic got into.
I'm going to have to use a technical term in economics to answer your original question. Why were people holding uninsured deposits in places like Signature? Beats the s*** out of me.
Do you think the FDIC has strayed from its mission to resolve these issues in the least expensive way possible?
The FDIC and the Federal Reserve and the Treasury did the right thing last year, they decided the risk of not covering uninsured depositors was too great. We might have set off a 1930s style run at a whole bunch of other banks.
We don't know how to quantify it, but man, the consequences of that happening are really bad, and they grit their teeth and covered all uninsured depositors.
I think I would have made the same decision, even though it meant that the FDIC suffered $45 billion of losses. I would have bitten the bullet and I probably wouldn't have slept very well on Sunday night either.
Comments
Post a Comment