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Opinion | FDR Will Hate Today’s Banking Crisis Fix

Second, he knew what it took to deal with the banking crisis, especially how to restore public confidence in the banking system. During the worst of the Great Depression, he faced challenges far more difficult than his current problems, but he managed to turn the situation around almost immediately. By contrast, today’s policymakers and regulators hesitate, hoping that empty words and weak measures can restore confidence. FDR Miller makes very clear the deficiencies of the current policy response.

Many people are surprised when I tell them that the FDR explicitly opposed federal deposit insurance during the 1932 presidential election. From 1931 to 1932, in the midst of the turmoil in the banking industry, many banks failed and depositors suffered losses. new york sun The Federal Deposit Insurance “will lead to negligence in bank management and carelessness on the part of both bankers and depositors. I do not believe there will be an outflow of Federal Treasury funds.”

FDR makes an important and empirically correct point here. Good bank risk management depends on depositor discipline.

Roosevelt then reluctantly agreed to create FDIC insurance at the insistence of Congressmen. Henry Steagall was part of a larger political deal, but he kept his agency limited to small deposit balances. , banks were allowed to reopen and take out insurance only after undergoing a thorough examination to prove they were in sound financial standing.

FDR did not address the bank panic by insuring the problem or waiting for more banks to close due to worried depositors. He first put an end to the crackdown by closing banks, establishing a credible process for reopening when banks showed strength. Regulatory investigations, which were apparently credible to independent observers and were often accompanied by capital increases, restored confidence in the system and allowed many banks to reopen quickly. Not because the deposit insurance system has limited coverage, but because the FDR actually addressed the problem of weakening banks that caused the bank runs.

What would be an equally effective policy response to the current crisis? Today’s problems are less serious and easier to solve.

there is only about 200 apparently vulnerable US banks Due to securities losses similar to those of Silicon Valley Bank. Regulators had to meet individually with these banks over the weekend to either quickly formulate credible recapitalization commitments or demand that they become guardians (from Monday morning). A conservatorship would have imposed restrictions on activity until it was determined whether an adequate capital increase could be provided or, if not, whether it was placed under control. During that time, they may have been allowed to pay all insured deposits, but could only pay a portion of uninsured deposits (the potential loss of uninsured depositors at each bank). On the basis of the). This has put pressure on these banks to resolve their problems quickly and has limited the illiquidity problem to a fraction of the uninsured deposits of a few banks.

If so, industry and academic experts could immediately reassure relatively ignorant depositors that the government’s policy response is effective and that there is no need for further vigilance. We know that some uninsured depositors would have preferred to move their funds as a long-term precaution, but the short-term urgency of these disruptions is significant. would have been reduced to

Instead, the Biden administration has done nothing about 200 vulnerable banks, fueling continued panic. Two measures they took last Sunday apparently failed to calm markets Did. First, Signature and SVB’s uninsured depositor relief have no appreciable impact on the loss risk of other banks’ uninsured depositors. Especially given how much these remedies have been criticized for being politically motivated and unfair. Uninsured depositors worried about their potential losses would not believe their money was now safe.

The second policy announcement had no effect. The Federal Reserve has created a new special lending facility for banks. It allows banks to borrow on eligible Treasury and agency securities for up to one year. Banks can borrow an amount equal to the par value of those securities, which exceeds their market value. This means a partially unsecured loan (as opposed to the typical “haircut” applied to collateral in central bank lending).

These loans are no reason for worrying uninsured depositors to feel safe. The decline in the value of vulnerable bank securities is not temporary and is essentially the result of Fed rate hikes, which will not only continue, but will continue to rise. Securities used as collateral do not appreciate as a result of Fed intervention. Second, the loan is for him only for one year, so when that year is over, the bank, which is currently insolvent because the value of the security has fallen, will still remain insolvent. For these reasons, the Federal Reserve’s lending program has made decisions not to withdraw funds immediately if uninsured depositors in failed or severely weakened banks are already inclined to do so. Never put down.

Now is the time to take the example of FDR seriously, address banking issues immediately and directly, and give U.S. depositors real reason to believe that there is nothing to fear, nothing to fear.

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