Are all bank deposits insured? Feds must get their story straight

It should be a simple question to answer: Are all bank deposits now insured, or aren’t they? Yet federal officials have repeatedly struggled to answer it. At a House hearing Thursday, Treasury Secretary Janet Yellen amended a previous amendment of her previously understood position on the issue. Yellen now says that the tools used to protect depositors in the collapsed Silicon Valley Bank and Signature Bank are “tools we could use again,” adding that “certainly, we would be prepared to take additional actions if warranted.”

The day before, Federal Reserve Chair Jerome Powell was asked at a news conference whether his repeated assertions that deposits were “safe” meant that “de facto deposit insurance covers all savings.”

“I’m not saying more than I’m saying,” Powell replied, adding that regulators are again “prepared to use those tools” they deployed earlier.

That leaves a lot of uncertainty. Under what circumstances could these tools be used again? What additional oversight actions are being taken to prevent needing to do more bailouts? Are all depositors going to be treated the same as those who banked with SVB and Signature?

Lawmakers, journalists and investors have been seeking clarity for over a week now. Most important, bank depositors themselves want assurances their savings are protected, or if not, where they would be protected.

Instead, officials have been trying to have their cake and eat it, too: making vague statements about deposits being “safe” that might give the impression every deposit is guaranteed, without explicitly saying so. The result is a mealy-mouthed mess, with markets swinging wildly on relatively incremental wording changes in public statements from senior officials.

The ambiguity that remains is contributing to stresses on the financial system. Why are officials so reluctant to provide more clarity?

There are some good reasons not to guarantee all deposits. In particular, there’s a fear — hung over from the 2008 financial crisis — that bank managers make bigger gambles with deposits if they perceive little downside risk in doing so (a phenomenon known as “moral hazard”). Also, to date, the fees assessed to cover insurance payouts haven’t been based on the assumption that all deposits are fully insured. So, effectively the feds would be on the hook for doling out insurance benefits that they haven’t (yet) collected premiums on.

There’s also the teensy-weensy problem of legality. The Federal Deposit Insurance Corporation (FDIC) guarantees bank deposits up to $250,000. Congress set that cap. Waiving it for a given institution requires the support of the treasury secretary (in consultation with the president) plus two-thirds of the boards of both the FDIC and the Federal Reserve.

In the case of Silicon Valley Bank and Signature Bank — where roughly 90% of deposits had been uninsured — officials ultimately decided making a “systemic risk exception” and guaranteeing every deposit was necessary because they feared greater contagion in the banking system. The Fed also provided liquidity for other banks and hoped that would be the end of things.

Alas, it wasn’t.

Lingering ambiguity about whether other smaller or medium-size banks’ deposits would also be fully protected in the case of a run have led to depositors at some smaller institutions, including First Republic, rationally moving their money to places they perceive as safer and “too big to fail,” such as Jpmorgan Chase and Citigroup.

There are, of course, also benefits that come from people believing their deposits are fully insured, even if that’s not exactly what Yellen and others are saying. Depositors are less likely to pull their money out of their bank if they think it’s safe where it is — and so, are less likely to start a bank run in the first place.

The problem with the government’s deliberately ambiguous approach isn’t confined to stock market volatility caused by confusion and re-re-reinterpretation of official policy.

Nonstrategic ambiguity could land the U.S. financial system in the worst of all worlds: continued deposit flight from more risk-averse customers who crave more certainty than Yellen et al. are currently offering; and moral hazard on the part of bank managers, who interpret the administration’s wink-and-nod, non-guarantee guarantee as a green light to gamble in pursuit of greater profits.

Everyone is in a tough spot here. Inflation has led to rate increases, which have contributed to bank runs, which can be stopped only with deposit guarantees, which could encourage banks to gamble. It’s a circular set of problems. Fixing one can make the others worse, and there might yet be more shoes to drop. There are emerging fears about potential defaults in the commercial real estate sector and other bubbling risks, for example.

But that’s why cutting through the ambiguity is so important.

This is a time for clarity, not vagueness. The administration could help by pushing Congress to give more direction on deposit insurance. What is and isn’t protected, under what conditions and for how long? Officials are understandably careful with their words, given the risks (legal and otherwise) involved. But they need to speak with greater clarity and get the story straight right now..