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Home World U.S. bank busts are prompting a closer look at deposit insurance — there and elsewhere

U.S. bank busts are prompting a closer look at deposit insurance — there and elsewhere

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Bank failures are bad. Not being prepared for them is even worse.

Canada and dozens of countriesdeposit insurance aims to protect people’s money up to a certain amount and provide financial stability when the worst happens.

Three times this year, the US has provided deposit insurance in the event of medium-sized bank failures. Most recently, First Republic Bank is expected to pay the deposit insurance fund for its, some $13 billion.

The collapse of the First Republic, the second largest bank failure in U.S. history, came weeks after the collapse of the Silicon Valley Bank (SVB). signature bank March. These banks’ previous resolutions cost him more than $20 billion in the same fund.

Amid the turmoil, as the United States and other countries try to adjust their deposit insurance offerings, some experts say bank failures can still occur no matter how much insurance you have. There is also

“It’s not a silver bullet,” said Claire Matthews, a banking expert at New Zealand’s Massey University. “It doesn’t necessarily prevent bank failures.”

Concerns remain about more banks failing

Prior to the collapse of the First Republic, the US Federal Deposit Insurance Corporation (FDIC) was reviewing the SVB and the failure to sign. Consider whether changes are necessary.

it has published the report Outlining possible reforms in the wake of those failures, Caused by the execution of uninsured depositors.

Martin Gruenberg, chairman of the US Federal Deposit Insurance Corporation (FDIC), made an appearance in Washington DC last month. The FDIC has released a report outlining reforms to consider for US deposit insurance. (Alex Wong/Getty Images)

The FDIC’s standard deposit insurance amount is US$250,000 per eligible deposit type per depositor. (In Canada, Deposit insurance covers up to $100,000 for each Nine Categories of Eligible Accounts, per CDIC member institution. )

SVB and Signature each had High percentage of total deposits exceeding FDIC deposit insurance levels — About 90 percent.However, regulators Declared Systemic Risk Exception For them, we fully cover all deposits.

that decision was made Strengthen trust in the banking systemalthough a recent Gallup poll suggests Nearly half of Americans continue to worry About money in the bank.

Saqib Bhatti, co-executive director of the U.S.-based Center for Action on Race and the Economy, said such fears could lead more people to move their money to large banks, and these large said it could further imbalance the scale in terms of the weight carried by such institutions. .

“These banks are too big to go bankrupt, so it seems safer to keep your money in these banks because you know the government won’t let them go bankrupt.

David Wessel, director of the Hutchins Center for Fiscal and Monetary Policy at the Brookings Institution, agrees that such concerns can put pressure on smaller institutions, harming those who depend on them.

“Smaller banks are often willing to take risks in lending to smaller businesses and their communities that larger banks are not,” Wessel said, echoing a point made by Batty. rice field.

“We don’t want a system that puts all the smaller banks under pressure,” Wessel added.

Still, the U.S. banking industry, like the FDIC, may be increasingly exposed to the “increasing concentration of uninsured deposits at large banks” surrounding the SVB and signing. said in that report.

This is done in tandem with operating in an environment where social media can amplify panic and rapidly withdraw funds. For example, SVB depositors withdraw tens of billions of dollars in a matter of hours.

“The sooner depositors move their funds, the more likely a bank run is likely, given rumors of bank problems and real problems.” Bayes Business School, London.

A customer reads a notice at Silicon Valley Bank's headquarters in Santa Clara, California.
A customer reads a notice regarding the closure of Silicon Valley Bank at the bank’s headquarters in Santa Clara, Calif., in March. (Noah Berger/AFP/Getty Images)

Possibility of reform

The FDIC report points to some potential reforms, including: Use unlimited levels of coverage. Or, target and increase coverage so that some types of accounts (such as accounts used for business payments) have a higher level of protection than others.

Opinions on what’s best Varies by Expertbut the FDIC says Prioritize targeted optionsgiven the protection to depositors and the stability it can offer, relative to its cost.

Bhatti says the US should implement unlimited compensation for all depositors, and he believes this is already a de-facto reality. But he also wants tighter regulation.

“Actually, let’s admit we’re going to cover deposits and crack down on the many risky behaviors these banks are involved in.

Higher protection spotlighted in UK

The UK is also considering changes to its deposit insurance system.

BBC report This includes the possibility of increased protection for bank savings, which are currently £85,000 (approximately C$145,000).

Bank of England Governor Andrew Bailey is seen speaking at an event in Washington DC
Bank of England Governor Andrew Bailey said expanding deposit insurance coverage would also increase costs for banks. (Elizabeth Franz/Reuters)

Bayes Business School’s Rodriguez Tous says it could be justified on an inflationary basis alone, as Britain is. I haven’t adjusted this threshold in years — and the longer it stays unadjusted, the higher the proportion of uninsured deposits.

“Normally, the threshold doesn’t move over time, which leads to more and more uninsured deposits,” he said.

But Bank of England Governor Andrew Bailey has suggested that trying to expand coverage would increase costs for banks.

“Considering the increase in deposit protection limits, it could be costly for the entire banking sector,” he said. during a speech in Washington last month.

“As with all things related to banking settlements, there are no free lunches.”

Canada has been asked to expand its own deposit insurance Ottawa expressed an intention to do soas needed.

according to plans in New Zealand

new zealand Currently not enrolled in deposit insurancebut that is about to change.

Legislation was proposed to create a compensation scheme that would protect up to NZ$100,000 (approximately 85,000 Cdn) per depositor per financial institution. The King’s consent is expected to be obtained this year. According to the Reserve Bank of New Zealand.

Matthews, a banking expert at Massey University, said New Zealand hasn’t seen a bank failure in years, and the recent disruptions in US banking seem far removed from everyday concerns. said.

The pending move towards a deposit insurance system seems to come from the realization that few other countries are set up similarly.

“It seems insane not to have deposit insurance,” Matthews said.

“If something happens and you lose a lot, it’s going to be hard to claim that you’re doing well if you’re different from everyone else.”

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