The Fed eyes "targeted adjustments" to prevent another banking crisis
The Federal Reserve is mulling over extra safeguards for big banks following a series of regional bank failures last year.
Michael Barr, the Fed’s vice chair of supervision, recently said the Fed is considering “targeted adjustments” aimed at larger banks to ensure they have enough reserves.
Bank reserves are cash that a bank must hold either in a vault on-site or in its balance at the central bank.
This cash is used to meet depositor withdrawal requests and other near-term financial obligations. Big enough reserves can help meet unexpected withdrawal demand, such as during bank runs.
"As we saw during the stress of a year ago, these types of deposits can flee banks much more quickly than previously anticipated," Barr said in prepared remarks.
Barr said it was unclear when he expected regulators to formally propose these changes.
A year of bank failures
Last year saw a surprising number of bank failures across the country when five banks collapsed—marking the end of a 28-month run without a closure.
This longest "insolvency" streak in 15 years ended with the failure of Silicon Valley Bank (SVB), a high-profile California bank catering to tech companies.
“The Silicon Valley Bank failure is the largest bank failure since 2008,” said UW law professor Anita Ramasastry. “This is significant. It's been a long time since the last failure that was as big as this one, which was Washington Mutual.”
SVB’s failure was due to its inability to lend out abundant deposits and its decision to invest them in government bonds at the worst possible time.
“They had to do something with all that money. So, what they could not lend out, they invested in ultra-safe U.S. Treasury securities," PBS reported.
"The problem is the rapid increase in interest rates in 2022 and 2023 caused the value of these securities to plunge.”
Why does a bank fail?
A bank fails when it can’t meet its financial obligation to creditors and depositors. This can happen when a bank becomes insolvent or simply doesn’t have the funds to cover withdrawals.
Even though the FDIC ensures bankers are protected up to $250,000, those with over a quarter million, like many of SVB’s customers, are at risk.
“If you have more than $250,000, you can explore other options to keep it covered under the FDIC,” Bankrate says.
“For example, you can keep $250,000 at one bank and deposit additional funds at other banks that are also members of the FDIC.”
An IRA or a revocable trust account—both of which fall under FDIC coverage—are other examples of accounts at risk if you have more than $250,000 in cash.