WASHINGTON — I, like many people, have a mental list of things that I need to do. There are immediate items on that list (that reminds me, I need to buy milk on my way home) and there are near-term items that I need to do soon but don't have to do today (which reminds me, I need to file my taxes).
And then there are items that are on the list but are neither immediate nor near-term, but more exploratory. A lot of times those things become more urgent as time goes on, but a lot of times my procrastination pays off, and the underlying problem gets resolved on its own or through other, simpler means.
A year ago, when depositors at Silicon Valley Bank were pulling their money and the bank itself was rapidly approaching failure, there seemed to be
Yet here we are today, and whatever urgency used to be evident in the need to expand deposit insurance has evaporated. House Financial Services Committee Chair Patrick McHenry, R-N.C., said Tuesday morning at an event at the Brookings Institution that passage of deposit insurance reform was "highly unlikely" in this Congress — which, incidentally,
There are very good reasons why those conversations are not intense. The most workable iteration of deposit insurance reform that the Federal Deposit Insurance Corp. considered in its
But what kinds of accounts might be included in or excluded from that universe is a policy question without a clear answer, and the risk of getting it wrong is that such accounts might end up being used for unintended purposes. That outcome could mean lots more insured deposits, which in turn would yield higher deposit insurance premiums — precisely the outcome that the business account insurance scheme was meant to avoid. All of this is keeping deposit insurance reform from serious consideration, McHenry said.
"All these other questions of basic implementation [need to be resolved]," McHenry said. "As policymakers, we usually don't get into the practical question of implementation until very late, but on this we need to start with a practical question."
Another cause of death of deposit insurance reform is another item on the post-SVB financial policy to-do list: discount window reform, which might go a long way to solving the bank run problem without making unnecessary distinctions between insured accounts. PNC CEO Bill Demchak, speaking at the same Brookings event Tuesday, said that if banks have ready access to liquidity through the Federal Reserve's discount window, then banks can cover their uninsured deposits, meaning you can stop a run before it starts.
"We are afraid of uninsured deposits because they can run. If I have collateral in a right-way discount window, it doesn't matter," Demchak said. "I don't think we need increased deposit insurance. I think that leads to bad behaviors. But I do think you need to have access to a good window with collateral to be able to cover uninsured deposits should they run."
The need to improve the mechanism by which banks access liquidity in a crisis has become abundantly apparent since the failures of SVB, Signature and First Republic last year — many banks were
It seems, then, that the urgency around deposit insurance didn't necessarily go away so much as it has been channeled into a more productive project — rethinking the emergency liquidity playbook — that has the added bonus of not necessarily requiring an act of Congress to proceed. Whether regulators come up with a liquidity strategy that works and is comprehensive, however, remains to be seen.
