The US government is concerned about the unlikely yet destabilizing possibility of nationwide bank runs. The Federal Reserve and Treasury already bailed out two banks last week, including the second-largest bank failure in the country’s history: Silicon Valley Bank. Now, the US Treasury is considering a backstop of all bank deposits nationwide.
The Federal Reserve has introduced a new Bank Term Funding Program (BTFP) with up to $2 trillion in extra liquidity. The Fed’s BTFP allows banks to borrow cash equivalents at favorable rates for up to 12 months to survive bank run-induced panics.
Needless to say, with the scope and scale of these actions, the mood of US bank depositors remains disquieted.
The power to backstop all US bank deposits
The Treasury Department is looking at ways to support smaller banks. Bloomberg reported that staff at the Treasury are considering an unprecedented guarantee of all US bank deposits, including account balances exceeding the FDIC’s $250,000 insurance limit. The guarantee could, if approved, cover deposits at US banks of all sizes, including regional and community banks.
Treasury Secretary Janet Yellen said the Treasury could cover deposits if bank runs were to pose a contagion risk, but she hasn’t yet made that commitment. During a speech she gave at an American Bankers Association event, Yellen further clarified that she didn’t intend to favor “specific banks or classes of banks.”
The Treasury could dip into a fund created in the 1930s called the Exchange Stabilization Fund. It usually uses the Exchange Stabilization Fund to trade foreign currencies and loan money to foreign governments. However, with relevance to a nationwide bank guarantee, the Treasury has also used it to make emergency loans to banks.