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WASHINGTON (Reuters) – The Federal Deposit Insurance Corp may need to seek temporary guarantees for all uninsured U.S. bank deposits to stem a drain of funds from small and regional U.S. lenders following deposit bailouts for failed banks SVB Financial and Signature Bank (NASDAQ:SBNY), former FDIC chair Sheila Bair said on Wednesday.
Bair, who oversaw hundreds of bank closures at the FDIC during the 2008-2009 financial crisis, told Reuters in an interview that the “one-off” deposit guarantees for Silicon Valley Bank and Signature have left depositors elsewhere fearing for safety and fleeing to larger institutions.
“My biggest fear now is that that lack of trust in the banking system takes hold and uninsured deposits start fleeing banks of all sizes to the biggest banks, just making them bigger again,” Bair said. “And that otherwise healthy banks get into trouble because their deposit base is unstable and running.”
If that continues, the FDIC and the U.S. Treasury should seek “streamlined” authority from Congress to guarantee all uninsured deposits and transaction accounts, which handle client company payroll and operations, she said.
Under the 2010 financial reform law known as Dodd-Frank, the FDIC was given the authority to lift its deposit cap for all accounts, in conjunction with the Federal Reserve and the Treasury Department, if a “liquidity event” exists that could harm the financial system.
Under that provision, the FDIC could lift the cap after Congress voted on the request on an expedited schedule. Such a move would be complicated by a divided Congress.
The FDIC took a similar action during the financial crisis, before the Dodd-Frank law was enacted.
Some regional banks came under renewed stock market pressure on Wednesday as a steep fall in Credit Suisse shares fanned contagion fears, and as S&P Global (NYSE:SPGI) Ratings and Fitch Ratings downgraded First Republic Bank (NYSE:FRC)’s credit rating over concerns about deposit losses. Fitch also put PacWest Bank on watch for possible downgrade.
A Reuters review of company filings and FDIC data showed that San Francisco-based First Republic had uninsured deposits of $119.5 billion, or 68% of its total.
Bair said she did not view Silicon Valley Bank or Signature Bank as systemically important institutions, adding that they could have been resolved through FDIC’s normal takeover process, with a “haircut” for uninsured deposits.
But a “supermajority” of the Federal Reserve and FDIC boards plus Treasury Secretary Janet Yellen and President Joe Biden made the determination that the two banks qualified for systemic risk exceptions, qualifying them for the backstops.
Bair said it wasn’t “realistic” for similar one-off determinations to be made for other banks, particularly those that fall below the revised “systemically important institutions” threshold of $250 billion in assets.
Bair also said she believed that the Federal Reserve should “hit pause” on interest rate hikes to better assess impacts on the financial system as well as the broader economy.”
