I support several key aspects of today’s proposed special assessment. I agree with the proposed exclusion of community banks. I agree more of the special assessment should be paid by those banks that were most exposed to the contagion risk that could have been triggered by the wind down of Silicon Valley Bank (SVB) and Signature Bank in the normal course. I also agree that a bank’s exposure to that contagion risk depended in part on its reliance on uninsured deposits.1
However, in my view, the special assessment could be better calibrated.2 All else equal, a bank was more exposed to contagion to the extent it relied on uninsured deposits to fund a larger share (distinct from amount) of its assets. All else equal, a bank was more exposed to contagion to the extent it was less capitalized, taking into account unrealized losses on securities.3 I would consider distinguishing between absolute and relative measures of uninsured deposits.4 I would also consider distinguishing between banks’ capital levels, after adjusting for unrealized losses.
Today’s proposal sometimes suggests the primary purpose of the FDIC’s use of its emergency powers was to prevent uninsured depositor runs.5 That rationale begs the question as to the mechanism by which the FDIC intended to prevent uninsured depositor runs, in particular whether the intent was to signal to other banks’ uninsured depositors that they would not be at risk of loss if their banks failed. Some in the press have even characterized the FDIC as having implicitly backed all uninsured deposits.6
The FDIC does not have the statutory authority to backstop all banks’ uninsured deposits, whether implicitly or explicitly. The FDIC board may recommend use of its emergency powers only if winding down a failed bank in the normal course would have serious adverse effects on economic conditions or financial stability.7 Even if winding down a failed bank would have serious adverse effects, Dodd-Frank Act reforms expressly prohibit the FDIC from using its emergency powers to guarantee the uninsured deposits of open banks.8
I supported the March 12 actions to mitigate a wider range of serious adverse effects on economic conditions and financial stability that could have arisen out of winding down SVB and Signature in the normal course. SVB’s failure on March 10 promptly led not only to Signature’s failure but also put First Republic at risk of failure and undermined public confidence in a handful of other banks. What magnified the risk of serious adverse effects was that SVB and Signature relied heavily on uninsured deposits. Those significant uninsured deposits had the perhaps nonobvious legal implication that, absent invocation of its emergency powers, the FDIC faced considerable difficulties selling SVB or Signature as a whole bank to a stronger bank and instead would have had to payout uninsured depositors after liquidating the bank’s assets.
The FDIC’s statutory least-cost-resolution requirement caps financial support for a failed bank acquisition at the expected loss to the deposit insurance fund from a liquidation of the bank.9 The loss to the deposit insurance fund from a liquidation of SVB or Signature was expected to be relatively small due to the significant amount of uninsured deposits that would bear losses. That in turn meant financial support for an acquisition was capped at a relatively small amount. It was my understanding that most any potential acquirer of the whole bank likely would have insisted on more financial support from the FDIC than permitted by law. Specifically, most acquirers likely would have required financial support sufficient to make the uninsured depositors whole so as to protect the goodwill associated with the acquired deposit franchise.10
These legal and practical constraints put the FDIC on a course to liquidating SVB and Signature through a series of asset sales and deposit payouts. The contemporaneous and sudden failure of two large banks was on its own a sudden shock to public confidence in the banking system. That adverse effect was likely to have been magnified by the lost going-concern value as a result of the liquidation; the disruption to the lending and other markets served by those banks; the dissipation of asset value during the liquidation process; and the missed payroll, bankruptcies, and other fallout arising out of large amounts of uninsured depositors’ working capital being locked up and subject to risk of loss.11 Even more importantly, the surest way to reinstate public confidence in the banking system has historically been for the private sector to stake a meaningful investment in a distressed bank; a liquidation would have missed out on that opportunity.
My March 12 vote was intended to mitigate these serious adverse effects by exempting the resolution of SVB and Signature from the least-cost-resolution requirement so as to facilitate subsequent sales of the failed banks that hopefully would preserve their operations and franchise value.12 My March 12 vote was not to backstop the uninsured deposits of all banks or otherwise commit myself to future votes to use the FDIC’s emergency powers. Going forward, as required by law, any decision to use the FDIC’s emergency powers should be approached skeptically, taking into account the unique facts and circumstances of the time, and with careful attention to the implications for the future.
1 I look forward to comments on whether all uninsured deposits should factor into the special assessment, in particular whether operational deposits should be excluded.
2 The timing and mechanics for collecting the special assessment also might merit further attention, particularly to the extent different approaches might have different regulatory capital implications.
3 What set SVB and Signature apart was that, respectively, 73 percent and 72 percent of their assets were funded by uninsured deposits (#1 and #2 on that measure among banks with greater than $10 billion in assets) and also that each had unrealized losses on their investment securities equal to, respectively, 104 percent and 32 percent of tier 1 capital (#1 and in the top one-third on that measure among banks with greater than $10 billion in assets).
4 The FDIC’s proposal dismisses this alternative because it “would result in institutions of vastly different asset sizes paying a similar dollar amount of special assessments.” NPR at 39. That need not necessarily be the case, depending on the calibration of the assessment rates.
5 For example, the proposal states six times “large banks and regional banks, and particularly those with large amounts of uninsured deposits, were the banks most exposed to and likely would have been the most affected by uninsured deposit runs.” Id. at 12, 17, 27, 37, 38, & 40. The proposal also states that “[f]ollowing the announcement of the systemic risk determination, the FDIC observed a significant slowdown in uninsured deposits leaving certain institutions, evidence that the systemic risk determination helped stem the outflow of these deposits while providing stability to the banking industry.” Id. at 15. There is otherwise little, if any, discussion of the other serious adverse effects on economic conditions or financial stability that could have arisen from the wind down of SVB and Signature in the normal course.
6 Editorial board, While Yellen Assures, Banks Run, Wall St. J. (Mar. 16, 2023) (“At the same time the FDIC guarantee of uninsured SVB and Signature deposits under its ‘systemic risk exception’ was supposed to prevent contagion by creating an implicit backstop at other banks.”); Nick Timiraos, Why the Banking Mess Isn’t Over, Wall St. J. (Apr. 23, 2023) (“So far, bank earning reports last week showed regional lenders, assisted by a quick and extraordinary government response that implicitly backed all uninsured deposits, have stanched the most severe outflows.”).
7 See 12 U.S.C. § 1823(c)(4)(G).
8 See Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1106(a), 124 Stat. 1376, 2125 (2010) (codified at 12 U.S.C. § 5613(a)).
9 See 12 U.S.C. § 1823(c)(4).
10 Related to this, a considerable number of SVB’s uninsured depositors were also its borrowers, such that depositor haircuts may have reduced the value of those loans.
11 The FDIC did announce it would pay advanced dividends on uninsured deposits. While this might have mitigated risks associated with freezing and haircutting uninsured deposits, there were limits on how much could be paid out in advance, and it was unclear the extent to which payroll and other working capital issues would have been avoided.
12 In the end, a meaningful portion of SVB and Signature’s assets was not sold to the acquirers in the initial sales, and the FDIC is continuing to liquidate those assets that were left behind. I have separately raised concerns about the competitiveness of the SVB and Signature auction processes, in particular whether the FDIC took appropriate steps to facilitate partnerships between banks and nonbanks. Those partnerships potentially could have increased competitive tension in the auctions, achieved higher prices for the failed bank assets, resulted in more of these assets being acquired in the initial acquisition, and perhaps even preserved more of the operating businesses and related going-concern value of the failed banks.