Wall Street is still getting over the trauma of last year’s local banking crisis. Somehow, the same problems that plagued banks that failed last year have come back into focus at banks that have recently fallen into crisis. That’s a lot of uninsured deposits.
Shares of New York Community Bancorp have fallen about 57% over the past two weeks as losses in commercial real estate loans have shaken the industry.
Investors say a sharp drop in the value of vacant office space loans issued by NYCB could prompt depositors with federally protected accounts with amounts of $250,000 or more to engage in typical bank runs. Are concerned. That hasn’t happened yet, and there’s no evidence that it will.
However, the fact that 40% of NYCB’s deposits are uninsured remains a risk to the bank and the industry as a whole.
To be sure, the risk is nowhere near that of the banks that failed last year. About 94% of Silicon Valley banks’ domestic deposits were uninsured, and 90% of Signature Bank’s deposits were uninsured, according to the Federal Reserve.
A customer waits inside a Signature Bank branch on March 13, 2023 in New York, USA.
Still, with so many local banks failing over the past year, questions must be asked: why would anyone put uninsured deposits in banks, and why would banks allow it?
Deposit insurance is a guarantee that your money is safe at a federally insured bank. Up to $250,000 per account guaranteed.
That’s enough for the majority of Americans. Congress raised the limit from $100,000 to $250,000 as an emergency measure during the Great Recession in 2008, and made the change permanent in 2010.
The funds are insured by the Federal Deposit Insurance Corporation and funded by fees paid by major U.S. banks.
As of the third quarter of 2023 (the most recent data available), the FDIC had approximately $119.3 billion in cash on hand. That’s about 1.13% of all insured deposits in the U.S., below the fund’s long-term goal of 2%, which the agency says is enough to withstand future banking crises.
The FDIC has approximately $119.3 billion in cash reserves, which is approximately 1.13% of all insured deposits in the United States.
Government-backed deposit insurance was created in 1933, right around the time of the Great Depression, when bank runs were rampant. According to James Lee and David Wessel of the Brookings Institution, about 40% of U.S. banks failed between 1929 and 1933.
In the words of the International Monetary Fund, the role of deposit insurance is to “ensure that depositors have immediate access to guaranteed funds even in the event of a bank failure, thereby reducing depositor incentives and reducing bank failure.” “to stabilize the financial system in times of crisis”. This is to “get away” at the bank. ”
Technically speaking, if your bank closes, everything in your bank account over $250,000 can be lost. That’s a pretty scary thought. About 40% of all U.S. money held in banks, or $8 trillion, is uninsured, according to Lawrence White, a professor at New York University’s Stern School of Management.
While $250,000 is a good amount for an individual account, it’s not very useful for a small business that needs to run payroll or pay suppliers.
The larger your business, the harder it is to split its funds between multiple banks. If a company has his $10 million, he should theoretically open accounts with 40 different banks to ensure that the funds are insured by his FDIC.
Instead, businesses can safely store cash in several different ways. Banks often provide something called “collateral,” which provides security such as securities or bonds. To secure amounts in excess of FDIC insurance limits.
Companies also utilize “sweep accounts,” where funds are automatically “swept” overnight into investment vehicles such as money market funds. Some companies also employ services that automatically distribute funds to multiple banks so that each bank stays below his FDIC insurance limit.
Companies often allocate a portion of their cash directly to government securities, such as Treasury bills, which are considered safe investments backed by the full faith and credit of the government. We also closely monitor the health of your bank to ensure your money is safe.
Ting Sheng/Bloomberg/Getty Images
Friday, December 30, 2022, at the U.S. Treasury Building in Washington, DC, USA.
Still, many companies with large amounts of cash keep much of that money in uninsured accounts.
Some of the companies affected by last year’s SVB collapse were start-ups that had large sums of money in bank accounts without safeguards for the cash. Most of the money was uninsured. Streaming device company Roku, for example, disclosed in a filing with the Securities and Exchange Commission that it held $487 million in “largely uninsured” deposits with SVB. Gaming platform Roblox announced it has $150 million in the bank.
It’s easier for a person or family to spread their funds across multiple accounts to ensure each account stays below the $250,000 insurance threshold. Couples can receive up to $500,000 in coverage.
However, some people still hold uninsured deposits. “I have to say, I don’t know. I don’t know,” White said. “It just takes a little while to open another account,” he said.
If a depositor’s money is in a bank that is considered “too big to fail,” they may decide it is worth the risk.
The FDIC spent about $23 billion cleaning up the mess left after Silicon Valley Bank and Signature Bank collapsed last year. That’s because he ended up making all of his account holders whole, including accounts like Roku and Roblox that were worth well over $250,000.
An employee holds the door open at a Silicon Valley Bank branch in downtown San Francisco, California on March 13, 2023.
If there is severe financial stress in the banking system, governments are allowed to temporarily lift the limits using what is known as a “systemic risk exception.” We will then assess any special fees paid by the bank.
It was the big banks that ended up paying most of those fees to SVB and Signature Bank.
JPMorgan Chase & Co.’s fourth-quarter 2023 profit was depressed by a one-time $2.9 billion charge the bank had to pay related to the crisis.
Bank of America paid $2.1 billion in FDIC fees and Citigroup paid $1.7 billion.
In some cases, the FDIC may negotiate the sale of the bank that maintains all your accounts. First Republic Bank, which failed last April, was sold to JPMorgan Chase. Major banks assumed all of First Republic’s deposits, but customers did not lose any money.
However, if a bank fails, customers can lose all of their uninsured funds.
Since 2008, uninsured depositors have suffered losses in just 6% of all bank failures. But before that, uninsured depositors typically lost all their money when a bank failed.
“The expansion of uninsured depositor relief raises serious concerns not only about fiscal costs but also about moral hazard,” Michael Ohlrogge, a professor at New York University School of Law, wrote in the study. “There is also a risk of violating the FDIC’s legal requirements to resolve failed banks in the lowest cost way possible and protect insured depositors.”
He said that in some cases, bailing out uninsured depositors could be the cheapest way to protect a bank’s insured depositors. However, rescue is often very expensive.
Moral hazard is a scenario in which one party takes a risky action because it is not protected from any consequences. For banks, this means they are more likely to take risky bets if they know they are better protected, increasing the likelihood of a repeat of this month’s turmoil.
That’s the question asked by the lawmakers.
Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, said Congress should consider raising the limits on guaranteed bank deposits after last year’s bank failures.
Sen. Elizabeth Warren, ranking member of the Senate Banking Committee, also said on CBS News’ “Face the Nation” that eliminating the cap on insurance is a “good move,” and said that eliminating insurance caps would be a “good move” and would reduce insurance costs between $2 million and $10 million. It suggests a range of dollars.
Last March, a coalition of midsize U.S. banks sent a letter to regulators asking the FDIC to expand insurance coverage for all bank deposits over the next two years to help restore confidence in the banking system. be.
“Doing so would immediately stop the flow of deposits from small banks, stabilize the banking sector, and significantly reduce the likelihood of further bank failures,” the Alliance of Midsize American Banks said in a letter.
But the FDIC said in a statement last May that insuring all deposits “could lead to a loss of depositor discipline and induce excessive risk-taking by banks.”
They also need to increase funding, which will “significantly increase the evaluation of banks.”