Currently, there are a few proposed banking regulation “fixes” being bandied about in Washington as a result of the SVB and Signature failures. As often happens with legislators, the temptation to do something without sufficient analysis of the problem is often too great to resist. Legislators would be well advised to take a measured approach as they consider what changes to make, if any, to banking legislation and regulatory oversight, especially when considering the very important issue of deposit insurance limits.
There are areas of “low hanging fruit” that could very well provide a smoother path to what should be a bi-partisan exploration of the causes of the SVB and Signature failures and ways to prevent failures in the future, an exploration that should consider existing legislation, the adequacy of regulatory oversight, and the role of bank management. An example of low hanging fruit would be claw backs of salary, bonuses and stock sale proceeds received prior to a bank failure. It is reasonable to think that agreement could be reached on legislation that would provide the regulators the ability to recover any bank salary or bonus paid to executives of a failed bank or to seize executives’ bank stock sale proceeds generated during a defined look back or preference period, say 90 or 120 days prior to failure.
Another piece of low hanging legislative fruit that lawmakers could very well get behind is prohibiting bank officers from serving on their own region’s Federal Reserve board of directors. This may not be the important banking reform in the effort to improve regulatory oversight, but it would clear up an obvious conflict of interest. The point of all this is that agreeing on some of the less controversial elements of banking reform would hopefully provide lawmakers with some legislative momentum and clear the table for the big issue— deposit insurance changes.
There are several ideas for deposit insurance changes floating around Washington. Some good, some bad. The worst is to insure all deposits. This would introduce too much risk (or moral hazard as politicos like to say) into the banking system and should be eliminated right away. Some of the more interesting ideas include: private insurance on uninsured deposits above certain levels, adding bank fund assessment fees based on uninsured deposit balances, and distinguishing deposit insurance levels based on whether the depositor is an operating business or just “parking money.” Of course, there is the plain vanilla solution of an across-the-board increase in deposit insurance thresholds to $500,000 or $1,000,000 per account.
Legislators need to take their time on the deposit insurance issue. A mistake here could have far-reaching negative effects on the banking system and the U.S economy. When considering ideas for deposit insurance changes, the hopefully bi-partisan effort to improve our banking regulation should avoid the past practice of not listening to industry participants’ ideas at the onset of the process and waiting for the implementation of a comment period to assess industry feedback. Industry participants have a huge stake in any legislative or regulatory changes and their upfront involvement would produce a better and, in many cases, a more practical piece of legislation.