Former FDIC chair worries 'bailouts' of two midsize banks could drive deposits from community banks to larger ones - Entrepreneur Generations

Federal officials' determination that two bank collapses posed “systemic risk” to the banking system, justifying their guarantee of uninsured deposits at the banks, poses a threat to smaller banks, a former chair of the Federal Deposit Insurance Corp. told James Jacoby of PBS's "Frontline."

Ex-FDIC chair Sheila Bair (PBS image)

“I do worry about community banks, in particular,” said Sheila Bair, FDIC chair in 2006-2011. “For these larger institutions, $100 billion, $200 billion, that’s not huge. But if you’re a $1 billion community bank, it’s a big difference. And what happens to them if the market starts assuming anybody, say, over $100 billion is going to have their uninsured deposits protected? Then that money is going to start going out of the community banks into those institutions that are viewed as having favored status. So these one-off bailouts that are particularly just for a couple of institutions create a lot of distortions and competitive disadvantages for others.”

Referring to what she called "bailouts" of Silicon Valley Bank and Signature Bank, Bair said "It’s extraordinary that they’re singling out just a couple of midsized institutions to basically bail out all their uninsured depositors. That is extraordinary. I have never seen that before. And the systemic-risk exception itself, which is the legal mechanism they’re using, is very extraordinary to trigger. It is meant to be used very rarely when things are really dire. . . . If they think just a couple of these small institutions have to be bailed out, how resilient is the system, really?"

Later, Bair said, "At this point, I still think these risks can be managed. I think that Silicon Valley Bank in particular was unusual, in that it had a lot of uninsured deposits. And it was a very concentrated group of depositors … Silicon Valley folks. And word spread very fast precipitating a bank run and that had a cascading effect on some other banks that had somewhat similar vulnerabilities though not as severe."

What about us? "I would say, if you have your money in a traditional community bank or regional bank, one where you banked for a long time, that has lots of households and businesses that do business with them, have done business with them for a long time, most of their deposits were insured or with institutions that have loyalty and multiple relationships with them — that’s the vast majority of the regional banks and community banks in this country. Stay where you are, right? Don’t get scared. If you’re a household, make sure you’re under the insured deposit limits," $250,000 per depositor, per bank, in each account ownership category. "If you are, the FDIC has a perfect record. … Again, I think most banks are okay. What we need to guard against is just contagion: otherwise healthy banks starting to lose deposits just because everybody gets scared."

from The Rural Blog https://ift.tt/dqC3IbJ Former FDIC chair worries 'bailouts' of two midsize banks could drive deposits from community banks to larger ones - Entrepreneur Generations

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