Former Federal Deposit Insurance Corp. chair Jelena McWilliams cautioned against lifting the cap on insured deposits in the wake of bank runs that caused two banks to fail this month.
McWilliams, speaking during a panel hosted by the Consumer Bankers Association on Wednesday, said raising the cap above its current $250,000 limit would have considerable costs that policymakers would have to take into consideration.
"There is the moral hazard cost there, there is the market discipline cost, and then there's the actual dollar cost for banks," she said, noting that the latter would not be incurred without some kind of pushback. "One of the most [common] appeals that I received on anything was the deposit assessments on the banks and the amount we charged them."
To prevent contagion in the wake of the failures of Santa Clara, Calif.-based Silicon Valley Bank and New York-based Signature Bank, federal regulators announced they would
McWilliams led the FDIC from June 2018 to February 2022. Since
During the event, she declined to comment on the supervision of the two banks, which were taken over by the FDIC within two days of one another. She also did not have specific policy recommendations for how to prevent the issues at hand from leading to similar failures in the future.
Instead, McWilliams urged politicians and regulators to take the time to fully understand the facts of what happened rather than changing policies based on preconceived notions.
"Beware of fast-moving legislative vehicles," she said. "We will probably have some legislation. I don't know how far, how much, or what, but I think people will have somewhat of a knee-jerk reaction and I truly hope that cooler heads prevail."
Aaron Klein, a senior fellow at the Brookings Institution and former Treasury Department official who also spoke on the panel, urged lawmakers not to use the bank runs — which were set off by coordinated withdrawals by large, uninsured depositors at Silicon Valley Bank — as justification for raising or removing the insurance cap.
Klein, who implemented the Troubled Asset Relief Program, or TARP, after the subprime mortgage crisis in 2007 and 2008, said the current level is already generous. Raising the limit into the millions, as some have suggested, would fly in the face of the insurance program's original intent, he said, which was to protect ordinary depositors.
"I was part of the legislation that bumped it from $100,000 to $250,000, which was TARP," Klein said. "Many of you may not know or recall, [but] that was put in as a sweetener to many of the people in this room to help them pressure their local congressman who voted down TARP in the House."
McWilliams said the most striking element of Silicon Valley Bank's failure was the speed at which it happened.
"When you think of a bank run, you don't think that you can lose $42 billion of deposits in a matter of hours," she said.
During
McWilliams said regulators have detailed information about supervisory deficiencies at individual banks. While she said the FDIC's internal mechanisms for organizing that bank-level data could be improved — she suggested the creation of an in-house data terminal with the latest call report data from the banks it oversees — serious issues do not come out of nowhere.
"You do know who the outliers among the banks are on a pretty granular level as a regulator," she said. "The question is, do you act on it? And at what point do you act on it?"
McWilliams and Klein both expressed skepticism about the role social media played in the demise of the two banks, despite suggestions by the Fed that speculation on Twitter drummed up panic among depositors.
"These are sophisticated corporate treasurers of companies that have $100 million, billion-dollar valuations pulling their money. Do you think they're pulling their money because Jim Joe had a tweet?" Klein said. "The Federal Reserve, in their testimony [to Congress], mentioned social media twice, and bank holding company regulation zero times."
McWilliams noted that some venture capitalists who kept their funds at the bank used social media and email to attempt to quell concerns among their fellow investors, so she does not view social media as a contributing factor to the failure. Ultimately, she said, the issue was a "general panic" about the health of the bank that turned into a "self-fulfilling prophecy" about its failure.
"I don't know if I would call it a Twitter run," she said. "Twitter was a vehicle, but to Aaron's point, it might have exacerbated the conditions that were happening in the bank, but I wouldn't say Twitter caused Silicon Valley Bank to fail."
