US authorities have been unwilling to allow SVB and Signature depositors losses above the $250,000 limit set by the Federal Deposit Insurance Corp. We don’t know if the UK would have done the same for the local SVB subsidiary above the country’s £85,000 threshold: a rescue by HSBC Holdings Plc made the issue moot.
The existing caps are set to give the average retail investor confidence in the system. Those with larger holdings – corporations and wealthy individuals – should either be wealthy enough to take a hit or smart enough to spread their money across different institutions and products.
In practice, policymakers seem to have a hard time maintaining the distinction when there is a crisis. The tech industry has done a good job of rating SVB’s clients as worthy of support, raising the specter of startups that don’t pay staff. Short-term payroll could have been covered by providing emergency funds (backed by SVB collateral), allowing customers to access 50% to 60% of their cash, for example. Nevertheless, the deposits were fully guaranteed. Otherwise there could have been bank runs elsewhere.
European regulators are quietly angry with their US counterparts over the decision, the Financial Times reported. Little wonder. When banks and customers believe that the authorities will salvage technically uninsured funds, large depositors simply give their money to the bank that pays the most, encouraging lenders to take risks.
And who pays for the oversized backstop? In the case of SVB and Signature, taxpayers will not be directly responsible for any losses, as the banking sector will pay if SVB’s assets are found to be insufficient to cover the bill. But that still means that well-run banks could end up covering the losses of poorly run competitors, and such costs are likely to be passed on to customers.
The episode should spur the private sector to provide coverage beyond current limits and encourage depositors to buy.
A run on a bank the size of SVB doesn’t look like an uninsurable risk. Bank balance sheets may be complex, but they’re arguably no more diabolical than the weather. There is already a mature market for insurance against bank defaults – so-called credit default swaps. In addition, major bank failures are relatively rare (and could be even rarer with more developed deposit insurance).
Depositors could purchase coverage up to a desired limit at the beginning of each year. The premium would reflect the risk of the institution and could be reset annually. This in turn would provide a signal for the quality of the bank’s management – and help to link checks and balances in risk-taking.
The insurance industry already offers some protection for the assets of high net worth individuals. The Securities Investor Protection Corp. offers up to $500,000 coverage in the event of a broker’s failure, with excess SIPC insurance also available privately.
It’s clear that scaling such products in banking is easier said than done. One concern is that the increasing interconnectedness of banks and insurance companies could exacerbate financial crises. Insurers would have to be willing to pay at short notice and not, as is so often the case with a property damage claim, proceed slowly. These liquidity needs could drive up policy costs. The same applies to the administrative costs arising from the need to regulate direct customer contracts.
But it is naïve to think that the banking and insurance industries are not closely related today. Additionally, insurers already offer certain types of coverage that pay off immediately — for example, to protect small businesses from bad customers. The administrative burden could be efficiently borne by banks acting as intermediaries.
And as long as people assume they’re covered by the state anyway, they won’t feel the need to buy a policy. Some coercion may be required – as with other types of insurance.
Ultimately, a public backstop will always be implicit given the scale of the problem. But as things stand, it feels like we’re going back to the idea of the taxpayer underwriting the financial system. More private insurance could at least help get us back in the right direction.
More from the Bloomberg Opinion:
• How this non-Silicon Valley bank managed cash: Marc Rubinstein
• Why is KPMG still auditing SVB after 30 years?: Chris Hughes
• Matt Levine’s Money Stuff: Silicon Valley Bank is for sale
This column does not necessarily represent the opinion of the editors or of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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