Federal Deposit Insurance Corporation (FDIC) building.
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The series of events that have transpired over the past few weeks has been unfortunate and we begin this week with the loss of yet another highly regarded financial institution. Against this backdrop, depositors need reassurance and banks are looking for ways to move forward and 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 can complement changes to deposit insurance coverage.
Banks provide the conduits that make the financial systems in our economy work. Looking at it through that lens, it becomes clear that the plumbing system is what needs to be insured. This would bring stability and confidence to businesses of all sizes and shapes, promoting a level playing field in the enviable, multi-sized financial system here in the US
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 created synthetically. All other deposits remain uninsured.
Many banks have recently focused primarily on the ratio of uninsured deposits, which are largely held in commercial accounts. After recent failures, we saw a narrative that led consumers and businesses to believe that their funds should be split across multiple entities, or that their money is safer in the largest institutions, ultimately creating the too-big-to-fail structure strengthened . The small and regional banks responded by deploying a mutual deposit product, essentially using an intermediary to extend deposit protection. Just pull up a current bank revenue report and you’ll see the change in your insured deposit ratio.
Next, and this is very unfortunate, these events have resulted in a loss of confidence in the industry. We’ve seen bank runs occur in small compressed windows of time due to the ability to circulate real-time information along with the faster movement of money. We have seen similar effects at other banks, with several regional banks suffering massive deposit losses.
To restore confidence, some in the industry have started a new narrative and are seeking full FDIC deposit coverage. This reaction is the pendulum swinging from one extreme to the other. While this may bring near-term reassurance, it sets the stage for a number of longer-term challenges and makes way for potentially ruthless competitors.
A small business owner fuels the local economy every day. From the team they employ to the vendors they pay to the services provided. As they grow, so does the financial impact on the economy. Those who use banking services for their day-to-day business – whether paying bills or doing payroll – should never doubt that the financial system is at risk.
Most of these companies have average balances in excess of $250,000. I think we need a split system. On the one hand, the funds that support the day-to-day operations of a business, often referred to as an operating account, are fully guaranteed. A business owner who uses core banking services in their day-to-day life should have peace of mind and worry-free when it comes to their operating accounts.
As with any other investment, when a company has extra funds and puts them into an interest-bearing account, there is a risk that can be taken in order to generate a return.
Currently, the frenzy is leading to a number of differing views on the subject. It’s important to keep an eye on the core components of the banking industry and design a solution that supports those core clients. The strength of the American economy rests on the diversity of its free market system, which has been supported by banks of all sizes. A bank failure should not cause panic throughout the system. Ultimately, we need a solution that will support and power our installation.