Former FDIC Chair Speaks Out Against SVB ‘Bailout,’ Says Biden Admin Overreacted

Sheila Bair attends the PBS 2023 TCA Winter Press Tour at The Langham Huntington, Pasadena, on Jan. 17, 2023. Alberto E. Rodriguez/Getty Images

Sheila Bair, former chair of the Federal Deposit Insurance Corporation (FDIC), has criticized the Biden administration’s decision to guarantee all deposits at the failed Silicon Valley Bank (SVB), labeling it an “overreaction.”

Bair said during a recent appearance on “The Washington Post Live” series that insuring all deposits at SVB and at the failed Signature Bank was an unnecessary “bailout” that would be paid for by extra fees on all banks, even well-run community and regional banks.

The former FDIC chief also threw cold water on proposals to waive the current $250,000 deposit insurance lid and for the FDIC to provide unlimited guarantees for all deposits across the entire $17.5 trillion U.S. banking sector.

“We need market discipline to complement the supervisory process,” Bair said. “Unlimited insurance, it would be very expensive to do, it would be assessed on the banking system backstopped by taxpayers and would primarily help very, very wealthy people.”

While the money that the FDIC uses to reimburse depositors in case of bank failures comes from assessments—or insurance premiums—levied on banks, the entire system is ultimately backstopped by taxpayers. In an emergency like a systemic banking sector meltdown, were the FDIC to deplete all of its $128 billion deposit insurance fund in reimbursing depositors, the Federal Reserve and possibly Treasury might step in to provide liquidity, especially if it were determined that the banking system was under too much strain in a systemic event to be able to handle the burden of additional assessments.

‘Situation Is Stabilizing’

Bair insisted, however, that despite the turmoil from the SVB and Signature failures, the overall U.S. banking system is sound.

“The vast majority of banks are safe and stable,” she said. “Overall, the system is fine. The biggest thing we have to fear now is fear itself, incentivizing people to make irrational withdrawals of deposits when it’s just not necessary.”

It’s a view shared by Treasury Secretary Janet Yellen, who at an American Bankers Association event Tuesday said that “decisive and forceful” actions to bolster public confidence in the banking system had stabilized the situation.

“The situation is stabilizing. And the U.S. banking system remains sound. The Fed facility and discount window lending are working as intended to provide liquidity to the banking system. Aggregate deposit outflows from regional banks have stabilized,” Yellen said.

Besides the FDIC providing unlimited guarantees to SVB and Signature Bank depositors, the Fed provided access to emergency liquidity by opening a swap line where banks could borrow on preferential terms against their Treasury holdings.

But while the Treasury secretary said that the moves restored confidence and prevented further bank runs, she said U.S. financial authorities were prepared to do more if the situation deteriorates.

“Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said.

Treasury Secretary Janet Yellen takes her seat as she arrives for a House Ways and Means Committee hearing on Capitol Hill in Washington on March 10, 2023. Drew Angerer/Getty Images

‘Systemic Risk Exception’

In consultation with President Joe Biden and Yellen, the boards of the FDIC and the Fed recommended a “systemic risk exception” for SVB and Signature Bank, designating them as systemically important and paving the way for unlimited deposit guarantees at the two banks.

Unlike most community and regional banks, which tend to have a larger proportion of insured deposits (below the $250,000 coverage limit), SVB and Signature Bank topped the list of banks with the highest share of uninsured deposits.

Around 94 percent of SVB’s deposits were uninsured, as were 90 percent of deposits at Signature. The average figure for big banks is about half that.

This made SVB vulnerable to a run on uninsured deposits, which is what happened when depositors got wind of a $1.8 billion loss when the bank had to sell low-priced Treasurys that had fallen in value due to the Federal Reserve’s rapid rate hikes.

A day before SVB’s collapse, its customers withdrew $42 billion in a single day, leaving it with a negative cash balance or around $1 billion. California regulators stepped in and appointed the FDIC as receiver, which set up a bridge bank—called the Silicon Valley Bridge Bank—transferred all customer deposits to it, and provided a blanket guarantee to prevent further deposit outflow.

The twin failures sparked a crisis of confidence in the broader banking sector, leading to calls by some lawmakers and market participants for the FDIC to temporarily waive its usual $250,000 coverage cap and guarantee all deposits.

Among the voices calling for expanded deposit guarantees is the Mid-Size Banks Coalition of America. It said in a letter to Yellen and key regulators that FDIC insurance should be extended to all deposits for two years to “restore confidence among depositors before another bank falls.”

It would be a move reminiscent of the FDIC’s decision during the financial crisis of 2008–2009 to expand its protection to unlimited deposit insurance for business checking accounts used for payroll and other operating expenses in order to prevent runs on smaller banks.

“We did this to protect community banks who were losing uninsured business customers to banking giants such as JPMorgan Chase and Wells Fargo,” Bair wrote in a recent op-ed in the Financial Times.

“The program was successful in ending runs on community banks,” Bair added.

Special Protections

While Bair opposed SVB and Signature getting special treatment under systemic risk exceptions and their depositors getting bailed out by blanket coverage, she spoke favorably of a temporary expansion of the FDIC’s cap across the entire U.S. banking sector as a confidence-building measure—but only if the crisis were to worsen.

“If regulators had evidence that uninsured bank runs would be widespread absent these bailouts, then a ’systemic' determination might be justified. But if that is the case, it would make more sense to temporarily backstop all uninsured accounts and charge banks a fee to cover losses,” Bair wrote in the op-ed.

Most of SVB’s clients were tech executives and venture capital funds, and “not a needy group,” in Bair’s view. She said they should have been aware of the FDIC’s coverage limits and been subjected to market discipline by being allowed to take some losses in the collapse.

Bair said that the SVB and Signature bailouts risked creating a two-tier system where some (bigger) banks are seen as enjoying special protections, exposing others to deposit outflows.

“If there are more failures, who are they going to bail out next? Anyone over $100 [billion]? What about community banks?” Bair wrote.

“If they create a perception that $100 [billion] is the new ’systemic' cut-off, uninsured deposits will surely flee community banks for those in the $100 [billion] club. And to add insult to injury for the smaller banks, by statute they will have to pay special assessments for costs associated with covering uninsured depositors at their larger brethren,” she added.

Separate investigations have been launched by the Justice Department, Securities and Exchange Commission (SEC), and the Federal Reserve into SVB and its executives’ actions before its collapse.