US Treasury considers 100% backstop of bank deposits

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The US government is concerned about the unlikely yet destabilizing possibility of nationwide bank runs. The Federal Reserve and Treasury already bailed out two banks last week, including the second-largest bank failure in the country’s history: Silicon Valley Bank. Now, the US Treasury is considering a backstop of all bank deposits nationwide.

The Federal Reserve has introduced a new Bank Term Funding Program (BTFP) with up to $2 trillion in extra liquidity. The Fed’s BTFP allows banks to borrow cash equivalents at favorable rates for up to 12 months to survive bank run-induced panics.

Needless to say, with the scope and scale of these actions, the mood of US bank depositors remains disquieted.

The power to backstop all US bank deposits

The Treasury Department is looking at ways to support smaller banks. Bloomberg reported that staff at the Treasury are considering an unprecedented guarantee of all US bank deposits, including account balances exceeding the FDIC’s $250,000 insurance limit. The guarantee could, if approved, cover deposits at US banks of all sizes, including regional and community banks.

Treasury Secretary Janet Yellen said the Treasury could cover deposits if bank runs were to pose a contagion risk, but she hasn’t yet made that commitment. During a speech she gave at an American Bankers Association event, Yellen further clarified that she didn’t intend to favor “specific banks or classes of banks.”

The Treasury could dip into a fund created in the 1930s called the Exchange Stabilization Fund. It usually uses the Exchange Stabilization Fund to trade foreign currencies and loan money to foreign governments. However, with relevance to a nationwide bank guarantee, the Treasury has also used it to make emergency loans to banks.

US gov’t creates moral minefield after SVB and Signature bailout

Some members of Congress expressed support for an increase in the FDIC insurance limit. The House of Representatives’ Freedom Caucus opposed the move, saying it would encourage banks to continue engaging in risky behavior at public expense.

Regardless, the Treasury is studying legal avenues that could bypasss Congress altogether on such an initiative. It’s looking for the fastest path to establish an emergency guarantee facility in order to support banks facing bank runs that could harm their ability to fulfill withdrawal requests.

The Mid-Size Bank Coalition of America requested the move, citing a potential financial crisis. They asked regulators to lift the FDIC’s current $250,000 cap on deposit insurance.

Major banks collapse this month

Silvergate Bank suffered a bank run after FTX and Alameda Research filed for bankruptcy. The two companies founded by Sam Bankman-Fried had held accounts at Silvergate.
Another large bank, Silicon Valley Bank, also suffered a $42 billion bank run fueled by social media rumors. This run drained its cash reserves. The FDIC declared it a systemic risk to the US banking system. It backstopped all deposits in full — even accounts holding more than $250,000.
The FDIC also backstopped another failed bank this month: Signature Bank.
As Credit Suisse succumbed to one of the largest bank failures in world history, the Swiss government, alongside the European Union, orchestrated its bailout by UBS.

Many banks are teetering on the brink of bankruptcy this month. Publicly traded bank stocks saw steep drops in price. Smaller banks also saw an upswing in withdrawals, sparking fears that the FDIC would ignore runs on small banks in favor of giant, systemically important banks.

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