A U.S. congressman has urged the federal authorities to briefly insure each financial institution deposit within the nation. Following the collapses of a number of main banks, he confused that if the federal government doesn’t do that, there shall be a run on smaller banks. “This is a contagion that could be spread across the entire banking system,” he warned.
Lawmaker Warns of Runs on Smaller Banks
U.S. Congressman Blaine Luetkemeyer (R-MO), a former banker and a member of the House Financial Services Committee, stated final week that the federal government ought to briefly insure each financial institution deposit within the nation.
His assertion adopted the collapses of a number of main banks, together with Silicon Valley Bank and Signature Bank. To forestall financial injury, the Biden administration and regulators assured all deposits on the two banks, even these exceeding the $250,000 Federal Deposit Insurance Corporation (FDIC) deposit insurance coverage restrict.
Noting that increasing the deposit assure would “give the system confidence,” Luetkemeyer was quoted by Politico as saying:
If you don’t do that, there’s going to be a run on your smaller banks … Everyone’s going to take their cash out and run to the JPMorgan’s and these too-big-to-fail banks, and so they’re going to get larger and all people else goes to get smaller and weaker, and it’s going actually be dangerous for our system.
“The thought process here is that this is a contagion that could be spread across the entire banking system if it’s not contained and if people don’t stop and be calm about their assessment of the situation,” the congressman opined.
He steered that the federal government might assure “every single deposit in this country and every bank” for six to 12 months till the “interest rate situation [is] resolved and these banks get back on solid footing,” the information outlet conveyed. However, the publication famous that the congressman later modified his place, and a spokesperson for him acknowledged that the assure may very well be in place for “perhaps 30 to 60 days.”
On Friday, Peter Orszag, the CEO of economic advisory agency Lazard, shared an identical view in an interview with CNBC. “Regional banks have relied on the business model that relied on uninsured deposits,” he stated, including:
Here’s what wants to occur at this level: the federal government wants to make express what lots of people are assuming, which is that for the foreseeable future, uninsured deposits don’t exist. Everything is insured.
Regarding whether or not doing so will lead to an ethical hazard the place banks really feel they’ll “take remarkable risks with depositors’ money,” Orszag insisted: “I don’t think it will create a moral hazard.” While emphasizing that “There’s going to be a lot more regulation,” he famous: “You are going to see continued flow of deposit concentration.”
While some individuals, like Congressman Luetkemeyer and Orszag, have expressed the necessity for the federal authorities to assure all deposits within the nation, Treasury Secretary Janet Yellen instructed the Senate Finance Committee on Thursday that not all deposits shall be assured. Nonetheless, she insisted that “our banking system remains sound.”
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