If required, the U.S. will protect the deposits at small banks

The Next Silicon Valley Bank: When Banks Got Their Own, And They Didn’t Eat Their Own: CNN Opinions on Economic Regulation and Financial Services

Editor’s Note: Lanhee J. Chen is a regular contributor to CNN Opinion and the David and Diane Steffy fellow in American Public Policy Studies at the Hoover Institution. He was a candidate for California state controller in 2022. He has played senior roles in both Republican and Democratic presidential administrations and has been an adviser to four presidential campaigns, including as policy director of 2012 Mitt Romney-Paul Ryan campaign. The views expressed in this commentary are his own. You can view more opinions on CNN.

When Silicon Valley Bank failed, policymakers and analysts began thinking about how to prevent similar failures in the future. When it comes to regulating financial services, history shows us that politicians react to the last crisis and one step behind the next one.

The savings and loan crisis of the 1980s led to passage of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, which closed insolvent financial institutions, created new regulatory agencies and implemented restrictions on how savings and loan (or thrift) institutions could invest deposited funds.

The Dodd-Frank Act was passed after the financial crisis, which made it easier to regulate the financial service industry and put restrictions on how banks do business. In the face of criticism that Dodd-Frank had gone too far in regulating banks, a bipartisan coalition in Congress passed and then- President Donald Trump signed into law some changes to Dodd-Frank.

While the best way to prevent the next SVB is likely to be viewed by policymakers through partisan-tinted glasses, there are avenues for Democrats and Republicans to work together. The window to open is too small and closing too late. This time next year, we’ll be in the throes of presidential primary elections, and neither party will be particularly interested in compromise — even if that’s what our financial system needs.

But they should. While Democrats generally favor more aggressive oversight of the financial system and Republicans largely argue that the current regulatory scheme is sufficient, the right answer looking ahead is somewhere in between.

Politicians may look to requirements of banks to make sure they arediversified in how they are investing their assets.

Some Republicans and many Democrats want to make sure that bank deposits over the current cap of $250,000 are also insured. Democratic Sen. Elizabeth Warren of Massachusetts, a vocal supporter of increased financial sector regulation, has called for increased deposit insurance that would be paid for by banks. The California Democrat is preparing to introduce legislation that will make sure deposits are protected if the insurance cap is raised.

The Federal Reserve will most likely handle some of the changes. This is probably a good thing, as these policymakers have some insulation from the political forces that directly affect lawmakers.

The U.S. Banks Protect the Banking System: State of the Art and View from the Senate Committee Hearing on Deposits at Small Banks

The Federal Reserve, for example, will likely examine the extent of both capital and liquidity requirements at banks based on their total assets. The resources a bank has to absorb losses can either be put in the capital of the bank or found in its assets. The measure of the cash and assets a bank has immediately at hand to pay obligations is known as “liquidity”.

America’s central bank may also look at the content of “stress tests” created by the Dodd-Frank Act and designed to regularly assess the health of large financial institutions across the country. For nearly a decade, tests have been benchmarked to a low-interest rate environment, which is not reflective of recent conditions.

The federal government provided emergency aid to customers at two regional banks that failed this month and Treasury Secretary Janet Yellen believes depositors at small banks may be eligible.

The comments, made at a banking conference Tuesday, were intended to stress the U.S. commitment to protect the U.S. banking system – and the customers who trust their money in it.

The government took extraordinary measures to guarantee all of Silicon Valley Bank’s deposits last week after panicked Depositors withdrew their money.

During a Senate committee hearing last week, she stated that deposits larger than $250,000 at small banks wouldn’t be guaranteed if the bank failed.

“The steps we took were not focused on aiding specific banks or classes of banks,” she added. “Our intervention was necessary to protect the broader U.S. banking system.”

The Treasury Secretary argued that the Federal Deposit insurance Corporation was right to cover all of the bank’s deposits even though deposit insurance is usually capped at $250,000.

The government worried that not backstopping larger deposits would encourage big depositors to pull their money out out of other banks, triggering a more widespread bank run.

“We’ve taken a lot of steps to assure the public that the banking system is still strong,” she said.

Smaller banks are concerned that their customers wouldn’t get the same relief offered to them at Silicon Valley Bank and Signature Bank.

“They’re able to provide services that other banks can’t,” she said. “They know the special features of their markets and the people who are active in those communities.”