FDIC Vice Chair Warns Against Overcorrection

WASHINGTON — In his first significant policy address since joining the Federal Deposit Insurance Corporation as vice chair, Travis Hill warned Washington to “avoid the temptation to overcorrect.”

Offering some background and lessons learned from recent bank failures at the Bipartisan Policy Center, Hill considered the FDIC’s role in the second (Silicon Valley Bank) and third (Signature Bank) largest bank failures in United States history.

“They say that central banks raise rates until something breaks and that monetary policy works less like a scalpel and more like a sledgehammer,” Hill opened. 

“The problems are never solely a result of rising rates, but monetary tightening puts pressure on the whole system,” he said. 

Following the 2008 financial crisis, interest rates stayed at or near zero for the better part of 15 years, “an extended period of easy-money policy that culminated with the extraordinary fiscal and monetary stimulus of 2020 and 2021.” 

The result of this was dramatic and rapid growth in the banking industry.

“In 2022 and 2023, the bill finally came due in the form of high inflation, and the Fed swung its sledgehammer in the form of higher rates,” he said. “In response, asset values fell and bank deposits began to shrink across the system.”

Silicon Valley Bank and some other banks did not properly maintain their interest rate risk and asset liability management, Hill explained, and were not able to correct the imbalance by either selling securities at a loss or raising capital to fill deposit holes. 

“Mismanagement of interest rate risk was at the core of SVB’s problem,” Hill said, “wiping out the tangible equity of the bank.”

The FDIC, which was created during the Great Depression to provide deposit insurance for banks, exists to maintain stability and public confidence in the nation’s financial system while still allowing market forces to work.

“One of the core principles from the International Association of Deposit Insurers states, ‘coverage should be limited, credible and cover the large majority of depositors, but leave a substantial amount of deposits exposed to market discipline,’” Hill quoted.

And while many believe that the FDIC coverage limit is $250,000 per depositor, he explained that “in the United States today, the amount of deposit insurance is capped at $250,000 per depositor, per institution, per right and capacity (or ownership category).”  

“This means it’s $250,000 for some depositors and much, much higher for others,” Hill said, “which might lead one to wonder whether those who would be most likely to impose market discipline are instead the ones most likely to ensure that all of their funds are insured.”   

Yet still, industry wide, the number of deposits that are uninsured has grown steadily since the 1990s.

Hill admitted that not only should the FDIC be better equipped to monitor trends — like deposit flows — in times of stress, but there have been other simple lessons learned from the recent bank failures.

“Once a bank fails, the government must move to find an acquirer as quickly as possible, and the FDIC needs to be open to any and all bidders and move with urgency and initiative to solicit bids and to make a deal happen,” Hill said. 

He also asked policymakers to consider banks’ ability, in times of failure, to immediately produce lists of key employees for the FDIC and to ensure they remain in place post-failure as it is “critical to continue operations in a bridge-bank scenario and to facilitate marketing to and due-diligence by potential acquirers.”

But even as he offered these suggestions, he warned that some may try to use recent bank failures as an excuse to undo past policies.

“In Washington, a town where people tend to criticize and blame first and learn and understand later — or never —there’s been an effort to blame the SVB failure on S.2155, the bipartisan banking law passed in 2018. And so we have people searching under the couch cushions, under the carpets, under the mattress, in the storage closet, trying to find something somewhere to tie the SVB failure to that law and its implementing rules. 

“I think it’s quite obvious that S.2155 had nothing to do with it,” Hill insisted. “The rule changes did not change stringency standards for a bank of SVB’s size. … The reasons for SVB’s failure are quite straightforward and easy to explain, and those rule changes had nothing to do with them.”

Kate can be reached at [email protected]