US Government: All Bank Deposits Over $250K Aren’t Insured Unless Systemic Risk Determined

US Government: All Bank Deposits Over $250K Aren’t Insured Unless Systemic Risk Determined

systemic risk

A Brinks worker exits Silicon Valley Bank in Santa Clara, Calif., March 10, 2023. (AP/Jeff Chiu)

Less than five years ago, then-U.S. Federal Reserve Chair Janet Yellen said she doubted there would be another financial crisis as long as she lives, thanks to reforms in the banking system since the Great Financial Crisis of 2008-2009.

A run on Silicon Valley Bank, which funded tech startups, led to its collapse on March 10 in the country’s second-largest bank failure. Two days later, Signature Bank in New York City also failed.

Now Treasury Secretary Yellen, President Joe Biden and the Federal Reserve and Federal Deposit Insurance Corp boards invoked “systemic risk exceptions” after the banks failed, which allowed them to protect uninsured deposits, including those of wealthy tech and crypto executives and investors.

The banking crisis raised fears that larger financial institutions would be strengthened at the expense of smaller ones, Business Insider reported.

Facing criticism, Yellen on Tuesday promised to safeguard deposits at smaller banks, saying that the Treasury and regulators were prepared to intervene if further deposit runs threaten more banking contagion, Reuters reported.

Deposit insurance, created during the Great Depression, has sharply reduced the frequency of bank runs that once were common in the U.S., according to Brookings. It’s the government’s guarantee that an account holder’s money at an insured bank is safe up to a certain amount, currently $250,000 per account. The FDIC or U.S. Federal Deposit Insurance Corporation insures deposits for a fee, charged to banks.

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But bank runs are hardly a thing of the past. Since 2001, 563 banks have collapsed, an average of about 25 per year, according to FDIC data.

Systemic risk refers to risks associated with the entire financial system. The 2008 global financial crisis is a good example of the systemic risk that large organizations with many interconnections pose, wrote Spiros Bougheas, professor of economics at University of Nottingham.

“They become ‘too big to fail’ because their collapse will affect not only the financial system, but the whole global economy,” Bougheas wrote.

The Treasury, Federal Reserve and FDIC announced on March 12 that customers at the failed banks would be able to access all of their money, including amounts over the FDIC’s $250,000 limit. 

On March 16, Yellen told a U.S. Senate hearing that uninsured deposits would only be guaranteed in banks deemed a contagion threat, raising fears at smaller banks that depositors would withdraw their money from accounts holding more than $250,000.

Less than a week after the March 16 Senate hearing, Yellen shifted her emphasis, promising to safeguard deposits at smaller banks and saying that Federal bank regulators are prepared to do whatever is needed to “ensure that depositors’ savings remain safe” in U.S. banks.

“A lot of us were kind of offended … that the Treasury was going to guarantee all of the deposits for the larger banks — the too-big-to-fails — and us smaller banks were going to be on our own,” said Daniel Kimbell, a bank executive at Vermont’s Passumpsic Bank, at an American Bankers Association conference in Washington.

Speaking to the American Bankers Association on Tuesday, Yellen said the guarantees offered to depositors in the failed Silicon Valley Bank could be replicated at other institutions. “The steps we took were not focused on aiding specific banks or classes of banks,” Yellen said. “Our intervention was necessary to protect the broader US banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Shares of First Republic, which fell about 85 percent this month, rose almost 30 percent Tuesday along with a broader rally in U.S. lenders.

Yellen’s public remarks reassured investors, said Casey Haire, U.S. banks analyst at Jefferies. “Having the Treasury secretary comment that they would step in as necessary is the clearest sign yet regulators could act.”