Regulators have only a few options at their disposal to deal with a crisis of confidence in the banking sector, with some type of measure to protect all deposits attracting a growing number of supporters on Wall Street. While blanket coverage is unlikely to take hold, a program in which depositors could pay a fee to protect cash above the $250,000 FDIC insurance threshold might be more feasible. Billionaire hedge fund manager Bill Ackman made an impassioned plea for a depositor safety net in a tweet on Wednesday. “Banking is a game of trust,” the CEO of the $18.5 billion Pershing Square Capital Management fund said in a message after the Federal Reserve meeting. “At this rate, no regional bank can survive bad news or bad data as a fall in share prices inevitably ensues, insured and uninsured deposits are withdrawn and “search for strategic alternatives “means an FDIC shutdown over the coming weekend.” Ackman did not provide details on how he thinks a deposit guarantee program would work, but he said it was essential to restore investor confidence in regional banks. “We’re running out of time to fix this. How many more unnecessary bank failures do we need to watch out for before the FDIC, @USTreasury and our government wakes up?” he said. “We need a system-wide deposit guarantee scheme now.” Hedge fund titan Nelson Peltz, co-founder of Trian Fund Management, also suggested that depositors should be required to pay a premium for anything over the $250,000 limit. “This should stop the flight of deposits from smaller regional and community banks,” he said in a Financial Times report. “I don’t think we want all the funds to just go to the big banks.” Deposit insecurity was at the center of the recent banking storm, which hit hard in early March during a run at Silicon Valley Bank. Concerns about the bank’s liquidity caused depositors to start withdrawing funds, which forced the bank to sell long-lived assets at a loss to cover deposits. SVB’s business model relied on large depositors whose funds were used to secure loans to highly indebted technology companies. Fears over the safety of these deposits sparked an additional run that ultimately caused SVB to collapse. When SVB and then Signature Bank went bankrupt, authorities stepped in to guarantee deposits while maintaining that stock and bond holders would be wiped out. This has put pressure on mid-sized banks, and the S&P Regional Bank ETF has fallen 40% since the start of the year. Other options Banking analyst Mike Mayo of Wells Fargo suggested an alternative could be fully secured deposits at $2 million, which he says is the average uninsured deposit per account. This would be in line with what the government did, albeit temporarily, after Lehman Brothers went bankrupt in 2008. Other options include a ban on short selling, which also has precedent from the time of the financial crisis, and accelerated mergers like the one that saw JPMorgan absorb the First Republic. Short sellers have ganged up on some regional banks with the expectation that even those rescued or merged will see their shareholders wiped out. “Renewed stress among regional bank stocks after the market close may cause (Washington, DC) to reconsider priorities,” Mayo said in a client note. That might be wishful thinking, though. Seeing bank shareholders take a beating during the current crisis is unlikely to be enough to spur Congress to act, said Ed Mills, Washington policy analyst at Raymond James. “Unfortunately, there is a significant disconnect between the renewed pressure on regional banks and DC’s posture,” Mills said in a note. “We don’t anticipate DC having a renewed emergency/new set of solutions unless things deteriorate significantly from here.” For his part, Fed Chairman Jerome Powell said the banking system as a whole was “sound” and said much of the work to fix the problems that led to SVB’s collapse would come back. to Michael Barr, the central bank’s vice president for supervision. “What we are in control of now is making a fair assessment, learning the right lessons, determining what the fixes are and implementing them,” he told reporters at a conference. Press. “For me anyway, it’s clear that we need to strengthen both supervision and regulation for banks of this size.”
Options to resolve the banking crisis are limited, but support is gaining