A US Congressman urged the federal government to temporarily insure all bank deposits in the country. In the wake of the failure of several large banks, he stressed that if the government does not do this, there will be a run on smaller banks.” He warned that “this is an epidemic that could spread throughout the banking system.
Lawmaker Warns Against Lending to Small Banks
U.S. Representative Blaine Rutkemeyer (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 remarks came in the wake of the collapse of several major banks, including Silicon Valley Bank and Signature Bank. To prevent economic damage, the Biden administration and regulators insured all deposits at these two banks up to the Federal Deposit Insurance Corporation (FDIC) deposit insurance limit of $250,000.
Noting that expanding the deposit guarantee would “give confidence to the system,” Luetkemeyer was quoted by Politico as saying.
If not, there will be an outflow of funds to smaller banks… Everyone will take their money out and run to JP Morgan and the too-big-to-fail banks, and they will get bigger and the other banks will get smaller and weaker, which will be really bad for our system.
“The thought process here is a contagion that could spread throughout the banking system if this is not curbed and people don’t stop and calmly assess the situation,” the Congressman opined.
The congressman proposed that the government guarantee “all deposits and all banks in this country” for six to 12 months until “the interest rate problem is resolved and the banks are back on sound footing,” the news media reported. However, the publication noted that the lawmakers later changed their position, with a spokesman for the lawmakers saying that the guarantee could be implemented “perhaps for 30-60 days.”
On Friday, Peter Orszag, CEO of financial advisory firm Lazard, expressed a similar view in an interview with CNBC.”
“Local banks have relied on a business model that relies on uninsured deposits,” he said, adding.
The government needs to make it clear what many have assumed: that there will be no uninsured deposits in the foreseeable future. Everything is insured.
As to whether doing so would create a moral hazard in which banks would feel that they could “take significant risks with depositors’ money,” Orszag asserts, “I don’t think there would be a moral hazard.” He also stressed that “there will be more regulation,” but noted that ” He stated that “the trend of deposit concentration will continue.
While some, like Senators 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 alldepositswould be guaranteed. Nonetheless, she insisted that “our banking system remains healthy.”
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