At the heart of Silicon Valley Bank’s failure were uninsured depositors — especially startup companies that held more than the insured limit of $250,000 and could not make payments without access to their accounts. It is tempting because of the SVB’s failure to think that the insured deposit limit should be raised, but that solution creates new problems. A better approach would be for the US to follow the example of other countries and create “payment banks” that are low-risk, highly regulated, and have access to the payment network. They can be a place where companies can park funds – such as VC investment reserved for payroll – without exposing themselves to the risks that normal banks do.
The failure of Silicon Valley Bank highlights the underappreciated weaknesses of the US banking system. While banking crises have historically centered on credit risk, this recent crisis of confidence stems from the unrealized loss of safe securities that have made depositors desperately seek liquidity. The liquidation of the securities crystallized mark-to-market losses and heightened the concerns of these depositors, and a bank run ensued.
While insured depositors have no reason for concern, the recent crisis has highlighted the critical role of large uninsured depositors, who are understandably vulnerable. They contain more than $8 trillion — or approximately 40% of all US deposits.
And one particular concern is evident: The prospect of many companies for not being able to pay a critical aspect of this crisis, because it became clear that some uninsured depositors are business clients who cannot pay their employees without access to their accounts.
The Problem of Uninsured Deposits
As an emergency response, it is necessary for the FDIC to effectively lift the deposit insurance limit and declare troubled banks systemically important to restore stability. That solution is problematic for several reasons. Without a lot of new regulations, unbundled deposit insurance gives banks terrible incentives. And the regulations needed to ease those perverse incentives could stifle risk-taking throughout the economy.
A deeper solution to this problem lies in understanding the problem of the uninsured depositor and addressing their needs more directly. It is easy to caricature the uninsured depositor as a reckless risk seeker. that flit between banks looking for yield. That caricature doesn’t deserve a bailout or much sympathy. But the truth is that many uninsured depositors are facing a big problem.
Consider the problem of payrolls in the private sector, which consists of more than $9 trillion of annual fund flows in the US alone. Large sums of money must be created on a regular basis and that money must be kept within a bank to access the payment system. These deposits have no choice but banks and, therefore, are exposed to the actions of banks that can lend or buy assets of large deposits. In that process, all of our wages are exposed to the decisions of bankers who accept these large, quick deposits, risk them, and then socialize the losses if we are forced to uncap the deposit. insurance.
The Case for “Payment Banks”
The problem of uninsured depositors is really the problem of access to the payment system – a system that is monopolized by central banks and then handed over to banks. The payroll problem is a notable example of this problem because payroll funds must be parked in banks, where they are exposed to the risks mentioned above.
Fortunately, other countries started looking for solutions to this problem. the United Kingdom, australianand Singapore everyone is changing and we can usefully learn from their efforts. There are effectively two possible solutions: Allow non-banks to access the payment system as allowed in the UK and others, or create banks that have no choice but to solve this “problem on salary.” We prefer the latter.
To solve the uninsured creditor problem without distorting the incentives for risk taking, the US had to create a special type of bank called a “payment bank” that did nothing but processing payments. Their deposit bases can be large and potentially volatile, they are tightly regulated (more so than money market funds), and they are unable to take any credit or maturity risk. In short, they take payroll deposits and other similar large B2B transactions and facilitate access to the payment system.
What is the business model for these payment banks? There are two possibilities: They can get a safe return by investing these deposits in the Federal Reserve at the federal funds rate, or they can charge their clients a very small fee for facilitating these large payments. Investing large amounts of these deposits over short periods of time in a risk-free manner can yield substantial returns, especially in the current environment, and it is possible that some of these returns may even be returned to depositors. .
While we describe this payroll problem, there are many other economic agents with large, quick deposits that only seek access to the payment system. Imagine a $100 million revenue business with $70 million in annual expenses and carefully saving money equal to one month’s expenses in a bank to cover payments. Alternatively, consider a venture capital or private equity fund seeking to raise capital or deploy capital to acquire companies.
Currently, these funds need to access traditional banks to access the payment functionality. In fact, that’s exactly the business model for both Silicon Valley Bank and First Republic Bank. But every bank has these types of customers. In fact, the wider landscape of card-based merchant payments – WHERE $9 trillion in card payments should go to the merchant’s bank accounts through the merchant’s brokers – have similar features.
By creating payments banks, large, volatile deposits that would exceed any reasonable deposit insurance limit would find a suitable home in a tightly regulated bank that was effectively credit-free. or maturity risk and facilitate their transactions. More importantly, the entire banking system will no longer bear the burden of these uninsured deposits and can return to their core function of retail deposits and making prudent lending and asset-liability decisions. And we can avoid uncapping the deposit insurance limit and make all banks important. In some sense, this solution is a less ambitious and more realistic endeavor than the one in use stablecoins or a central bank digital currency to facilitate B2B payments on alternative payment channels. In many ways, this idea reflects the principles of industrial energy clearing and settlement used in financial markets to a wider set of payments.
The truth is that the US banking system has become less dynamic since the global financial crisis. Entry is almost non-existent. While the number of banks in the US It may be higher than other countries, the truth is that we don’t need more traditional banks — we need different types of banks. Crises are terrible things to waste.
