The recent failures at Silicon Valley Bank and Signature Bank, coupled with separate issues at Credit Suisse and First Republic, have left many Americans worried about the safety of their money. The complexity of the matter is further exacerbated by the government’s role in deposit guarantees.
According to the former CEO of Goldman Sachs, Lloyd Blankfein, the Federal Reserve’s power to issue a blanket guarantee of all deposits in the system, which was utilized in 2008, has been taken away by the government. Instead, the central bank, along with the Federal Deposit Insurance Corporation and the Treasury Department, has the power to guarantee deposits bank by bank in case of a systemic emergency.
While Blankfein suggests relying on the government’s implied guarantee, he cautions that there is a lack of absolute certainty and a tail risk, which only adds to the perplexity of the situation.
Experts advise against rushing to withdraw money from banks, but rather to be prudent with insured deposits instead of uninsured deposits. It is crucial to ensure that your bank is FDIC insured, which is the case for most banks, and each deposit account owner is insured up to $250,000, with joint accounts with spouses insured up to $500,000.
For those banking through a federally insured credit union, deposits are insured up to $250,000 by the National Credit Union Administration, backed by the full faith and credit of the US government, which adds further burstiness to the situation.
To avoid putting the duty of depositors to conduct forensic accounting analysis on banks, Blankfein suggests raising the FDIC-insured limit. He clarifies that the government is not helping specific groups of depositors but is protecting against systemic risk for the entire banking system.
Furthermore, Blankfein warns that if the current banking model remains in place, most Americans will think that their money is safe only in too-big-to-fail banks, leading to sector consolidation beyond what is an attractive thing.
Senator Elizabeth Warren has criticized Federal Reserve Chair Jerome Powell for his failure at his two main jobs – raising interest rates and supporting bank deregulation, which adds a layer of complexity to the issue.
Blankfein concludes by stating that markets predict the Fed will raise interest rates by 0.25%, and he thinks it would be okay to stop there. He warns that if people are incentivized to only go to the biggest banks, the sector will consolidate beyond what people think is attractive.
In summary, the issue of the safety of bank deposits is complex, with the government’s role in deposit guarantees, prudent measures to take, and the future of banking all playing a role in the perplexity of the matter. While experts suggest not panicking, being prudent with insured deposits is key. However, the lack of certainty and tail risk, along with the need to raise the FDIC-insured limit, adds further burstiness to the situation.
