A US congressman has urged the federal government to temporarily insure all bank deposits in the country. Following the collapse of several major banks, he stressed that if the government doesn’t do this, there will be a run on the smaller banks. “This is a contagion that could spread to the entire banking system,” he warned.
Lawmaker Warns of Runs on Smaller Banks
US Congressman Blaine Luetkemeyer (R-MO), a former banker and member of the House Financial Services Committee, said last week that the government should temporarily insure all bank deposits in the country.
His statement followed the collapses of several major banks, including Silicon Valley Bank and Signature Bank. To prevent economic damage, the Biden administration and regulators guaranteed all deposits at the two banks, including those that exceeded the Federal Deposit Insurance Corporation’s (FDIC) deposit insurance limit of $250,000.
Noting that expanding the deposit guarantee would “give confidence to the system,” Politico quoted Luetkemeyer as saying:
If you don’t do this, there will be a run on your smaller banks… Everyone will take their money out and run to JPMorgan and these too big to fail banks, and they will get bigger. and everyone else will get smaller and weaker, and that will be really bad for our system.
“The thought process here is that this is a contagion that could spread to the entire banking system if it isn’t contained and if people don’t stop and calm down about their assessment of the situation,” the congressman opined.
He suggested that the government could guarantee “every single deposit in this country and every bank” for six to 12 months until “the interest rate situation (is) resolved and these banks are back on sound footing.” conveyed by the media. However, the publication noted that the congressman later changed his position, with a spokesperson for him stating that the guarantee could be in place for “perhaps 30 to 60 days.”
On Friday, Peter Orszag, chief executive of financial advisory firm Lazard, shared a similar view in an interview with CNBC. “Regional banks have been based on the business model that was based on uninsured deposits,” he said, adding:
Here’s what needs to happen at this point: The government needs to make explicit what many people are assuming, which is that for the foreseeable future, uninsured deposits won’t exist. Everything is insured.
As to whether doing so will lead to moral hazard where banks feel they can “take notable risks with depositors’ money,” Orszag insisted: “I don’t think it creates moral hazard.” While he emphasized that “There’s going to be a lot more regulation,” he noted, “You’re going to see a continued stream of deposit concentration.”
While some people, such as Congressmen Luetkemeyer and Orszag, have expressed the need for the federal government to guarantee all deposits in the country, Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday that not all deposits will be guaranteed. However, he insisted that “our banking system remains strong.”
Do you think the federal government should guarantee all deposits? Let us know in the comments section.
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