March 12, 2023 09:40 AM UTC

Bank Regulations

• 2 Comments
• by: Ckonola

I saw a Twitter post from the GOP lamenting that President Biden hasn’t weighed in on the California bank failure. I watched the Meet the Press segment on the topic this morning. Both convinced me that I should write a little someting.

By now it is ancient history, but once upon a time I was a “Correspondent Banker.” Those bankers were dinosaurs already when I left banking, but their role was to manage relationships with other banks, in short consultants to other, generally smaller banks. In that capacity, I read many regulatory reports about audits.

The comments we should anticipate will be coming from the FDIC, not President Biden. They are the agency that will be paying depositors up to the insured limit of $250,000. What the FDIC has done in the past is look for a bigger bank to take on the assets and liabilities of the failing bank. Usually they have time to do this because regular audits disclose weaknesses of management, problem loans, liquidity, capital adequacy. When a weakness is discovered, the regulator writes a Memorandum of Understanding. That MOU outlines the expectations of the regulators that would improve the condition of the bank.

Rapidly rising interest rates may be difficult to anticipate, thus regulators may have been slow to identify the liquidity problem in the California bank. Having said that, governmental entities generally expect their deopsits in excess of the insured rate to be secured by Treasuries. From what I’ve seen over 80% of the deposits in this bank were uninsured, and when one tweet suggested that a major customer was taking their deposits out of the bank, other customers decided to do the same, thus causing a “run on the bank.”

Talk about a run on other regional banks is irresponsible, given that none of the commentators have taken the time to measure the liquidity of those other banks. I also was amused at the Meet the Press question of whether the insured limit should be raised. When I was a banker, the insured limit was $100,000, so there is a history of raising that cap. Whether this is the time to do so should depend on how increased insurance premiums would impact the individual banks, and whether there is a trend for regional banks to accept mostly deposits over the cap, thus increasing the likelihood that the bank would be unable to function in the event of large depositors leaving.

… just a short memory dump, but I hope it puts some of the angst into perspective.