Uninsured depositors are at the heart of Silicon Valley Bank’s failure. Especially startups that had well over the $250,000 insurance limit and couldn’t pay their salaries without access to their accounts. While appealing given that SVB does not assume that guaranteed deposit limits need to be increased, the solution raises new problems. A better approach would be for the US to follow the example of other countries and create “payment banks” with little to no risk, highly regulated access to payment networks. They will be places where businesses can deposit funds without being exposed to the risks that regular banks create.
The failure of Silicon Valley Bank has highlighted the vulnerability of an underestimated US banking system. Banking crises have historically focused on credit risk, but the recent crisis of confidence stemmed from unrealized losses in safe-haven securities, leaving depositors desperate for liquidity. The liquidation of these securities materialized mark-to-market losses, fueling concerns among those depositors and bank runs continued.
Insured depositors have no cause for concern, but the recent crisis has highlighted the critical role of large uninsured depositors who are understandably prone to anxiety.they make up more $8 trillion — Or about 40% of all U.S. deposits.
And one particular fear stands out: the prospects of many companies can’t calculate payroll It was a key aspect of the crisis, as it emerged that some uninsured depositors were unable to pay their employees without access to their accounts.
The problem of uninsured deposits
As an emergency response, the FDIC needed to restore calm by effectively removing restrictions on deposit insurance and declaring troubled banks systemically important. That solution is problematic for many reasons. In the absence of many new regulations, uncapped deposit insurance presents a terrifying incentive for banks. And the regulation needed to mitigate these formidable incentives could stifle risk-taking across the broader economy.
A deeper solution to this problem lies in understanding the dilemma of uninsured depositors and addressing their needs in a more direct manner.It’s easy to satirize uninsured depositors as reckless risk seekers go back and forth between banks in search of yieldThat caricature deserves no salvation or sympathy. But the reality is that many uninsured depositors face a major dilemma.
Consider the issue of salaries in the private sector. $9 trillion Annual capital flows in the United States alone. Large amounts of money need to be processed on a regular basis, and that money must be stored in banks in order to access payment systems. These deposits have no choice but the bank and are therefore exposed to the actions of banks that can lend or buy assets with these large deposits. In the process, all of our salaries are exposed to the decisions of bankers who can socialize losses when they are forced to accept these large and volatile deposits, take risks, and decap deposit insurance. You will be able to
Case of “settlement bank”
The problem for uninsured depositors is really a problem of access to payment systems — systems monopolized by central banks and then delegated to banks. Payroll problems are a prominent example of this problem. Payroll funds must necessarily be held in banks, where they are exposed to the above risks.
good luck, other countries I started to find a solution for this problem.of England, Australiaand Singapore All are innovative and we can learn usefully from their efforts. Either allow non-banks access to payment systems like the UK and other countries have allowed, or create banks that only solve this ‘payroll problem’. we prefer the latter.
To solve the uninsured creditor problem without distorting the incentives for risk-taking, the United States should create special banks called “payment banks” that only process payments. Their deposit base is large, can be volatile, is highly regulated (even more so than money market funds) and cannot take credit or maturity risk. In short, they receive payroll deposits and other similar large B2B transactions and facilitate access to payment systems.
What will the business model of these clearing banks look like? There are two possibilities. They can invest these deposits in the Federal Reserve for a safe return. Investing large amounts of these deposits in a very short period of time in a risk-free manner can yield substantial returns, and some of this return may even be refunded to the depositor.
We have characterized this as a payroll problem, but there are many other economic entities with large and precarious deposits intended solely for access to payment systems. Consider his $100 million revenue business where annual costs cost him $70 million and he carefully keeps a month’s worth of cash in the bank to cover payments . Or think of a venture capital or private equity fund looking to raise capital or deploy capital to buy a company.
These funds currently require access to a traditional bank to access payment functionality.Indeed, that’s exactly what both business models are Silicon Valley Bank and First Republic Bank. However, any bank Customers like thisIndeed, the broader realm of card-based merchant payments — where $9 trillion in card payments Must go to a merchant bank account through a merchant acquirer — have similar functionality.
By establishing a clearing bank, a tightly regulated bank that can facilitate transactions with virtually no credit or maturity risk for large and unstable deposits well in excess of reasonable deposit insurance limits. can find the right place for you. More importantly, the banking system as a whole is no longer burdened with these uninsured deposits and can return to its primary function of making retail deposits and prudent lending and asset liability decisions. We can also lift restrictions on deposit insurance to avoid making every bank systemically important. In some ways, this solution is a less ambitious and far more realistic endeavor than facilitating his B2B payments with alternative payment methods using stablecoins or central bank digital currencies. In many ways, this idea reflects the principles of industrial strength. Clearing and Settlement Employed in Financial Markets For a wider set of payments.
The reality is that the US banking system has become less dynamic since the global financial crisis. almost no entry. on the other hand, US banks It may be higher than in many other countries, but the truth is we don’t need more traditional banks. So we need different kinds of banks. A crisis is a terrible thing to wasteand this can lead us to a much safer banking system by recognizing the problem of uninsured depositors and creating a home for them.
