Trump Gave Mid-size Banks and Big Depositors a Free Lunch
Two key points about the decision to guarantee all the deposits at Silicon Valley Bank (SVB):
- It was a bailout
- Donald Trump was the person responsible.
The first point is straightforward. We gave a government guarantee of great value to people who had not paid for it.
This is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
We will get a lot of silly game playing on this issue, just like we did back in 2008-09. The game players will tell us that this guarantee didn’t cost the government a penny, which will very likely end up being true. But that doesn’t mean we didn’t give the bank’s large depositors something of great value for nothing.
If the government offers to guarantee a loan, it makes it far more likely that the beneficiary will be able to get the loan and that they will pay a lower interest rate for this loan. In this case, the people who held large uninsured deposits at SVB apparently decided that it was better, for whatever reason, to expose themselves to the risk by keeping these huge deposits at SVB, rather than adjusting their finances in a way that would have kept their money better protected.
[The Federal Deposit Insurance Corp. guarantee is for up to $250,000 in bank deposits. SVB disclosure statements show that in December 97% of its deposits were for larger sums.]
This would have meant either parking their deposits at a larger bank that was subject to more careful scrutiny by regulators, or adjusting their assets so that they were not so exposed to a single bank. They also could have taken 10 minutes to examine SVB’s financial situation, which was mostly a matter of public record.
For whatever reason, the bank’s large depositors chose to expose themselves to serious risk. When their bet turned out badly, they in effect wanted the government to provide the deposit insurance that they did not pay for. [Banks pay FDIC premiums based on risk factors, that cost is then built into bank charges.]
This brings us to the second point; this is Donald Trump’s bailout.
The reason this is a bailout is that the government is providing a benefit that the depositors did not pay for. It also is, in effect, a subsidy to other mid-sized banks, since it tells their depositors that they can count on the government covering their deposits, even though they are not insured and the bank is not subject to the same scrutiny as the largest banks.
Trump SIgned Law
This is where the fault lies with Donald Trump. It was his decision to stop scrutinizing banks with assets between $50 billion and $250 billion that led to the problems at SVB.
Prior to the passage of this bill, a bank the size of SVB would have been subject to stricter rules and regular stress tests.
A stress test means projecting how a bank would fare in various bad situations, like the rise in interest rates that apparently sank SVB. The 2018 changes exempted banks with assets under $100 billion from undergoing stress tests (SVB had been in this category until 2021), and said that banks with assets between $100 billion and $250 billion only had to undergo “periodic” stress tests.
If regulators had subjected to SVB to a stress test, they would have almost surely recognized its problems. They then would have required it to raise more capital and/or shed deposits.
But Trump pulled the regulators off the job. This is wrongly described as “deregulation.” It isn’t.
Deregulation would mean both eliminating the scrutiny of SVB and ending insurance for the bank. (In principle that would mean ending all deposit insurance, not the just the insurance for large accounts that is at issue here.)
The Free Lunch
What happened in 2018 was effectively allowing SVB [and other banks in its size category] to still benefit from insurance without having to pay for it. It is comparable to telling drivers that they don’t have to buy auto insurance, but will still be covered if they are in an accident. Or, perhaps a better example would be telling a restaurant that it is covered by fire insurance, but it doesn’t have to adhere to safety standards.
It is dishonest to describe this as “deregulation.” It is the government giving a subsidy to the banks in question. While it is understandable that the banks prefer to describe their subsidy as deregulation, but it is not accurate.
Anyhow, this is the Donald Trump bailout. He touted the 2018 bill when he signed it. We are now seeing the fruits of his action.
Hello, Dean. In light of the article you authored on March 20, might this post needs to be amended regarding Donald Trump being to blame for the SVB failure? The title of that article is “Regulators Never Looked at Silicon Valley Bank’s Key Vulnerability”.
I agree with the substance of this article, and the other one: There were plenty of problems with SVB that Fed bank examiners should have raised concern over, even if they were not conducting interest-rate risk based stress tests. Keep up the good work. Bernie Safron of Swarthmore College would be proud of you!