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The FDIC and Fed are looking for ways the US government can guarantee all bank deposits amounting to $17 trillion should the financial turmoil worsen.
The US government is considering ways to guarantee bank deposits if the current banking crisis worsens. According to reports, the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve are exploring a potential guarantee of all US bank deposits. Officials from both parastatals embarked on this scheme on advice from a banking coalition that deemed it necessary to avert a financial crisis.
This development could also mean that the FDIC and Federal Reserve seek to guarantee the mammoth sum of $17 trillion in deposits. Both independent government agencies maintain that taxpayers should not pay for the ongoing banking crisis. However, the feasibility of the proposed bank deposit guarantee plan remains to be proven.
Treasury Department officials are reviewing federal regulators’ emergency authority to temporarily insure deposits higher than the current cap. This limitation is set at $250K and applies to most accounts. As it stands, the only way federal regulators can ensure deposits greater than $250,000 is with formal consent from an extremely divided legislature.
US Bank Deposits Guarantee Seen as Contingency Measure
According to inside sources, authorities do not yet deem the move necessary. The reason is that regulators moved to assist banks in keeping up with withdrawal demands earlier this month. The ongoing agenda to guarantee bank deposits is a contingency measure should things spiral out of control.
White House spokesman Michael Kikukawa recently touched on the development. Without confirming or denying reports that a fiscal study is underway, Kikukawa explained:
“We will use the tools we have to support community banks. Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed.”
However, government concern still abounds amid the call by midsize banks for more substantive intervention following the collapse of three banks. This month alone, Silicon Valley Bank (SVB) and Signature Bank declared bankruptcy after uninsured depositors withdrew their funds. In addition, a fourth bank, First Republic Bank, is struggling to stay afloat. First Republic’s shares tumbled 47% on Monday, underscoring a March stock drawdown above 90%.
US Big Bank Coalition Rushes to First Republic Aid
However, as the embattled bank teeters on the brink, several big banks seek to redeem First republic. A coalition of banking giants led by JPMorgan (NYSE: JPM) has pledged $30 billion to prop up the San Francisco-based bank. In addition, this banking group is also devising a sustainable plan to ensure that First Republic remains solvent and operational. The JP Morgan-led banking coalition provided some insight into its rationale in a statement that read:
“This action by America’s largest banks reflects their confidence in First Republic and in banks of all sizes, and it demonstrates their overall commitment to helping banks serve their customers and communities.”
Elsewhere, analysts believe that the banking crisis could trigger a suspension of rate hikes by the Federal Reserve.