The Breakdown - The FDIC is Exploring How to Ensure All US Bank Deposits

Episode Date: March 22, 2023

Just a week after backstopping Silicon Valley Bank and Signature, the FDIC is reportedly exploring how they could feasibly cover all US deposits. NLW explores the implications.   Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. The breakdown is produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, March 21st, and today we are talking about potentially the expansion of FDIC insurance. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right, friends, another day, another set of serious updates around the global banking crisis. We start with First Republic, which had another shocking day on Monday,

with the stock price plummeting 47% to an all-time low. The stock was halted nine. times during its free fall and has now lost 90% of its equity value since the beginning of March. First Republic has experienced a massive $70 billion in deposit outflows over the month, as customers grow concerned about the safety of the bank afflicted with the same duration mismatch impairment that took down Silicon Valley Bank alongside signature. Now, on Friday, a consortium of major banks led by J.P. Morgan Chase agreed to offer First Republic $30 billion in deposits, consisting of the deposits which would float out of the troubled Community Bank. Ratings Agency S&P said this package may not be enough to solve the, quote,

substantial challenges facing the bank even if it does ease short-term pressures on liquidity. On Monday, J.P. Morgan's CEO, Jamie Diamond was back in talks to discuss converting the $30 billion in deposits into a capital infusion in an attempt to calm the panic around the already shaky bank. JP Morgan investment bankers have also been hired by First Republic to explore options with a sale also being in the cards. Unfortunately, right now it's not clear how likely that is. Now that's said, First Republic doesn't necessarily represent the entire banking industry. With some time having passed since the collapse of Silicon Valley Bank and the introduction of the Fed's emergency liquidity program, the bank term funding program or BTFP, regional banks

actually saw a broad rally on Monday. This was led by New York Community Bank Corp, which will discuss in just a moment with a record 30% daily gain. Zero X makes he says, if you're in crypto and not following what's happening on Community Bank Twitter right now, you should be. Regardless of intent, the effect of both Chokyotech. chokepoint 2.0 and our two-tier deposit insurance double standard is the same to centralize resource allocation decisions in D.C. and New York. Now, when Macy refers to the two-tier deposit insurance double standard, he's talking about the fact that small and regional banks don't necessarily have all of their deposits insured above the $250,000 FDIC level, whereas the two big

to fail banks do. And as we've seen, those two big to fail banks have been getting a lot of the deposits that are coming out of these smaller and regional banks. Now, getting into the specifics of First Republic, Joseph Wang points out that part of the issue has to do with their collateral. Joseph writes, one reason why First Republic Bank looks like it's imploding could be because it can't actually benefit from the Fed's new bailout facility. You need treasuries and agency mortgage-backed securities to tap the facility and they barely own any. Broadly speaking, only big banks hold lots of agencies and treasuries as regulations strongly encourage them too. The thousands of smaller banks make loans rather than buy securities. This point about which

collateral is accepted by the bank term funding program is something we'll come back to in just a moment, but I wanted to flag it. Now, one of the big debates that has been raging on Twitter is whether the new Fed bank term funding program and other Fed liquidity programs in general are inflationary. Last weekend, the headline that the Fed's balance sheet had grown by about $300 billion in a week had almost everyone on crypto and Bitcoin Twitter screaming inflation. And by the way, that was the common interpretation for some even outside our little cryptosphere. This was probably spiritually led by Bologi Trinivasen, who argued that these programs are the first step to hyperinflation and even made a million-dollar Bitcoin bet to say so. Still, on the other side were those who pointed out that banks

availing themselves of the Fed's discount window and BTFP reflects a deflationary impulse instead, because they're taking those Fed dollars to cover depositors withdrawing funds, not to turn around and make new loans, which would be the process by which the balance sheet expansion would turn into new money creation and thus potentially new inflation. Still, a lot of what's missing in the conversation and the debate is time scale and future assumptions. So take specifically someone like Arthur Hayes, the former CEO of Bitmex. In his recent tom on exactly this issue, he's not necessarily arguing that in the short term.

These programs aren't going to be used for exactly their stated purpose of covering short-term outflows of deposits. Instead, he has a particular set of beliefs about the trajectory of the programs. He writes, As stated in the BTFP document, the facility only accepts collateral on banks balance sheets as of March 12, 2023, and ends one year from now. But as I alluded to above,

I don't believe this program will ever be ended, and I also think the amount of eligible collateral will be loosened to any government bond present on a licensed U.S. bank's balance sheet. Now, Arthur goes into the mechanics of why he believes this, and while that's important to determining whether or not you agree with his position, for the purpose of the argument I'm making right now, what matters is simply the fact that he's arguing not about the BTFP as a discrete program

with a discrete purpose as it's being used right now. He's arguing that there is almost certainly going to be very quick mission creep that ends up expanding the BTFP to be a permanent program. Biology also falls into this type of camp, and for both of them, this next bit of news seemed to confirm all of their suspicions. I'm speaking, of course, about the reports that broke last night about the expansion of FDIC insurance. According to anonymous Reuters' sources, U.S. officials are studying ways to temporarily expand FDIC insurance to all U.S. depositors without needing to ask Congress to pass any legislation. U.S. Treasury staff are studying whether federal regulators have enough emergency authority

to extend the cap on accounts above the current $250,000 limit. One possible mechanism would be to use the Treasury Department's authority to take emergency action and use the exchange stabilization fund to finance the measures. authorities reportedly do not see the need to act yet with the emergency liquidity facility in place, but are developing a strategy in case the situation worsens. A Treasury spokesperson told Bloomberg that, quote, due to decisive recent actions, the situation is stabilized, deposit flows are improving, and Americans can have confidence in the safety of their deposits.

Now, this reporting comes on the back of calls over the weekend from a coalition of mid-sized banks to extend FDIC insurance to cover all deposits for the next two years, as well as revelations that more than 160 mid-sized banks could be under balance sheet pressure due to unrealized losses in their bond portfolios if their books were not adequately hedged. Arthur Hayes retweeted the Reuters piece about them studying FDIC expansion and says, Studying, hmm? The answer will be very clear to them once another mid-sized bank who can't access bank term funding program fails. Infinite money printing to save the banking system is not far away.

Bitcoin equals $1 million. Now, others just looked at the numbers and found that, to be concerning if this is a serious line of inquiry. Finance Alot tweets, FDIC's deposit insurance fund only has $128 billion in reserve. Total U.S. bank deposits are $19.5 trillion. There are 4,875 FDIC insured commercial banks, 85% are small and 11% medium. The 140 large institutions represent only 3%. The uncontrollable tsunami Yellen just unleashed will be astounding. And this, of course, brings Congress and the larger political sphere into the discussion. James at I Might Be Wrong on Twitter says, as far as I know, they can't guarantee all deposits about 10 trillion uninsured without Congress.

FDIC can only do it for banks in receivership, which explains First Republic Gymnastics. Maybe under COVID-Cares Act wiggle room? If they go through Congress takes ages and everyone inserts weird random provisions like pesticide subsidies for their uncle's pumpkin farm, so they're going to have to jam it through authorities of another bill or help telegraphing big boy actions makes the crowd stop moving things around. End quote. Still, this might be the type of thing that Congress actually comes together to fight for. Alex Stapp, a co-founder at the Institute for Progress, says, a really important and counterintuitive point from Ezra Klein that most people aren't aware of. The small banks are much, much more politically powerful than the big banks in Washington, D.C.

They're popular, and every member of Congress has a small bank in their district. So right now, this is just Reuters reporting, but it is obviously worth keeping an eye on. Join CoinDesk's Consensus 20203. The most important conversation in crypto, and Web 3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web 3, and the Metaverse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code Breakdown to get 15% off your paths.

Visit Consensus.coindex.com or check the link in the show notes. And speaking of keeping an eye on, let's keep it on the FDIC for just one more minute. One of the questions surrounding Signature Bank was whether they were going to be forced to sell without their crypto business. Remember, it wasn't the FDIC that originally decided to surprise shut signature down. That was the New York Department of Financial Services, and reportedly, among everyone else being surprised, the FDIC was also surprised at that decision. However, Reuters reported last week that the FDIC was making it a condition of any sale to shed the crypto business. In other words, if someone was going to buy the assets of signature, they needed to agree to not continue with the crypto business, not continue to maintain Cigna, etc.

This was denied vociferously by authorities and led to huge debates on crypto Twitter, but then over the weekend, we got a sale of signature bank's assets that didn't include the crypto assets. Caitlin Long writes, they did indeed keep out the crypto deposits, and then quotes a newspiece about it. Flagstar Bank's bid did not include the $4 billion of deposits related to former signature bank's digital banking business. The FDIC will provide these deposits directly to customers. Investor Adam Cochran says, hearing from a few of their clients that digital banking does indeed mean their crypto operations. So the signature bank takeover will leave any of their crypto clients unbanked. Also means Cignet will be 100% dead. David Marcus, formerly of Facebook, now the CEO at Lightspark,

says, I really hope we will understand how Signature Bank was selectively stripped of its digital asset business before being acquired. Nick Carter, who has obviously been one of the loudest voice, not only on Operation Chokepoint 2.0, but also in terms of the questions around the legality of signature bank being shut down in the way that it was, writes, crypto business not included. Wow, wow. The FDIC lied and Reuters was correct. I'm shocked, shocked, I tell you. This is the same FDIC chair who presided over Chokepoint 1.0, by the way. I'm sure the spin tomorrow is going to be this was entirely Flagstar's decision. Of course, they saw what happened to the last two guys that stuck their heads out and supported

crypto. Now, expanding on the point that Nick kind of buried in there, Yesterday, Nick Carter also tweeted, fun fact. The man ultimately responsible for Chokepoint 1.0 was FDIC chair Marty Grunberg, who served from 2012 to 2018. The current FDIC chair has a really close relationship with him, because he is also Marty Grunberg. Indeed, the Competitive Enterprise Institute actually protested Grunberg's appointment because of his involvement in Operation Choke Point.

So it's not like this was unknown. Anyway, when it comes to crypto and related issues, the political jousting definitely continues to heat up. One more story on that front comes from Florida and presumptive Republican presidential candidate Ron DeSantis. DeSantis has proposed legislation that would prohibit the use of a national central bank digital currency within his state. In a press release, DeSantis said, quote, Today's announcement will protect Florida consumers and businesses from the reckless adoption of a centralized digital dollar, which will stifle innovation and promote government-sanctioned surveillance. End quote. The proposed law would also prohibit the use of CBDCs issued by foreign

central banks. The governor has called on other states to follow his lead and prohibit a U.S. CBDC on a state-by-state basis. In addition to concerns around privacy and financial control, DeSantis also suggested that adoption of a CBDC would diminish the role of community banks and credit unions in the U.S. financial system. Cash is King, the release said, the minute it's all digitized, someone else is going to have control. Now, some see this as a pretty ineffective or at least just a political move. George Gammon, who is no fan of the Fed or current monetary politics, says, got to call out all politicians, even the slightly better ones. Although I like the concept, DeSantis trying to ban CBDC use in Florida is nonsense.

A CBDC is simply a digital dollar that's a liability of the Fed. So DeSantis would have to ban the use of bank reserves. One could also argue that there's no legal difference between a federal reserve note and a bank reserve, so he may be banning cash as well. This is simply political theater to gain approval. If you want to legally prevent a CBDC, it has to be via enforcing Federal Reserve Act. End quote. Still, the clear flip side is that CBDCs are now in the national conversation at the presidential election level.

Dennis Porter, the CEO of Satoshi Action Fund, says being supportive of CBDCs is about to become political suicide in the Republican Party. I'm tracking three presidential hopefuls who have just made very, very strong moves to oppose CBDCs. Incredible to see. So, friends, there is so much going on. It continues to be really intense out there. And because of that, let's end on a slightly lighter note. Over in Belgium, authorities are cracking down on crypto advertising, ensuring that ads are accurate and warn investors of risks under new laws announced on money. day. Crypto ads will now be required to be submitted to the financial services and markets authorities

10 days in advance, allowing the regulator to intervene if necessary. In a statement, the FSMA said, quote, virtual currencies are all the rage at the moment, but they involve considerable risk. They are often subject to wild price fluctuations and are vulnerable to fraud and IT-related risks. FSMA cited concerns that crypto traders are often seeking to get rich quickly and have been undeterred by last year's crypto industry failures in market drawdown. Spain and the UK already have similar advertising standards in place for crypto firms, which mirror the disclosures required for broader financial industry advertising. But that's obviously not the lighthearted part. The most notable part of this news was the mandated slogan which regulators chose to be

inserted into crypto ads. This is the type of thing that they put on cigarette packages, for example. The slogan the Belgium went with is the only guarantee in crypto is risk. However, as many have pointed out, this makes crypto sound totally badass. Mr. Kagan writes, Belgium, gonna accidentally make crypto cool again. Big Head Crypto says the only guarantee in life is risk, embrace the uncertainty. The fourth society says what they don't seem to understand is that I'm here solely because of the risk and reward ratios. TMNXEQ says they make it sound like it's a bad thing. Turns out, people like risky stuff.

Still, I think Bloomberg's Joe Wisenthal gets it most on the money when he says, honestly, that's kind of metal. Indeed, Joe, it is. Anyways, guys, with all of this going on, if you can't laugh, I don't know what's tell you, we're in for more crazy times and I appreciate you hanging out as we go through them. Until tomorrow, be safe and take care of each other. Peace.