At the heart of Silicon Valley Bank’s failure were uninsured depositors, particularly start-ups with far more than the $250,000 insurance limit, who were unable to pay without access to their accounts. It is tempting because the SVB cannot assume that the insured deposit limit should be increased, but this solution creates new problems. A better approach would be for the US to follow the example of other countries and create “payments banks” that take little risk, are highly regulated and have access to the payment network. They will be a place where companies can park funds, such as VC investments designed for salary, without being exposed to the risks that normal banks create.
The failure of Silicon Valley Bank highlighted the understated fragility of the US banking system. While banking crises have historically focused on credit risk, this latest crisis of confidence stems from unrealized losses on safe securities, which have caused depositors to anxiously seek liquidity. The liquidation of those securities crystallized market losses and heightened anxiety among these depositors, and a bank run ensued.
While insured depositors have nothing to worry about, the recent crisis highlighted the important role of large uninsured depositors, who are understandably prone to anxiety. They amount to more 8 trillion dollars — or roughly 40% of all US deposits.
And one particular concern stands out. the perspective of many companies unable to make payroll An important aspect of this crisis was that it became clear that some uninsured depositors were business customers who could not pay their employees without access to their accounts.
The problem of uninsured deposits
As an emergency response, it became necessary for the FDIC to effectively eliminate the deposit insurance cap and declare troubled banks as important to restore system stability. That solution is problematic for many reasons. In the absence of many new regulations, unlimited deposit insurance gives banks terrible incentives. And the regulations required to mitigate those dire incentives could stifle risk-taking throughout the economy.
A deeper solution to this problem lies in understanding the uninsured depositor’s dilemma and addressing their needs in a more direct way. It is easy to caricature the uninsured depositor as a reckless risk seeker which flits between banks looking for yield. That caricature is not worthy of salvation or much sympathy. But the reality is that many uninsured depositors face a huge dilemma.
Consider the problem of private sector wages, which is more 9 trillion dollars in annual fund flows in the US only. Large sums must be disbursed regularly and these sums must be deposited in the bank to enter the payment system. These deposits simply have no choice but to go to the banks, and are therefore exposed to the actions of the banks, which can lend or buy assets with these large deposits. In the process, all of our wages are subject to the decisions of bankers who can take these large, volatile deposits, take risks with them, and then socialize the losses when we have to forgo deposit insurance.
The case of “Payment banks”.
The problem for uninsured depositors is actually the problem of accessing the payment system, a system that is monopolized by central banks and then delegated to the banks. The payroll issue is a notable example of this problem, as payroll funds must be deposited in banks, where they are exposed to the above-mentioned risks.
fortunately other countries have begun to find solutions to this problem. It The United Kingdom, Australiaand: Singapore all have innovated and we can usefully learn from their efforts. In practice, there are two possible solutions: to allow non-banks into the payments system, as the UK and others have allowed, or to create banks that do no more than solve this “wage problem”. We prefer the latter.
To solve the problem of unsecured creditors without distorting risk-taking incentives, the US should create a special class of banks called “payment banks” that do nothing more than process payments. Their deposit bases will be large and potentially volatile, they will be very heavily regulated (even more so than money market funds), and they will not be able to bear any credit or repayment risk. In short, they would take payroll deposits and other similar large B2B transactions and facilitate entry into the payment system.
What will be the business model of these payment banks? There are two options. they can earn a safe return by investing these deposits in the Federal Reserve at the federal funds rate, or they can charge their customers a very small fee to facilitate these large payments. Investing large sums of these deposits safely for very short periods of time can generate significant returns, especially in the current environment, and it is possible that some of these returns may even be returned to depositors.
Although we have characterized this as a wage problem, there are many other economic agents with large, volatile deposits that are only seeking access to the payment system. Consider a business with $100 million in revenue that has $70 million in annual expenses and wisely keeps cash equivalent to one month’s expenses in the bank to cover payments. Alternatively, consider a venture capital or private equity fund that seeks to raise capital or deploy capital to acquire companies.
Currently, these funds must enter traditional banks to gain access to the payment function. Indeed, that is the business model for both Silicon Valley Bank and First Republic Bank. But every bank has customers of this type. Indeed, a wider range of card-based commercial payments. where? $9 trillion in card payments must make their way to merchant bank accounts through merchant acquirers – has similar characteristics.
With the creation of payments banks, large, volatile deposits far in excess of any reasonable deposit insurance limit would find a suitable home in a highly regulated bank that bears virtually no credit or repayment risks and can facilitate their transactions. More importantly, the entire banking system will no longer carry the burden of these uninsured deposits and can return to their core function of making retail deposits and prudent lending and asset and liability decisions. And we can avoid eliminating the deposit insurance cap and making all banks systemically important. In some ways, this solution is a less ambitious and far more realistic endeavor than using stablecoins or central bank digital currency to facilitate B2B payments on alternative payment rails. In many ways, this idea reflects the principles of industrial strength clearing and settlement in financial markets to a wider set of payments.
The reality is that the US banking system has become much less dynamic since the global financial crisis. Access is almost non-existent. Meanwhile Number of US banks may be high compared to many other countries, the truth is we don’t need more traditional banks; we need different types of banks. Crises are terrible things to wasteand this one can lead us to a much safer banking system by recognizing the problem of uninsured depositors and creating a home for them.