The US government does not consider deposit insurance of any size necessary
Following the collapse of Silicon Valley Bank and Signature, US credit institutions have asked the Treasury Department to consider insuring deposits regardless of their size. Currently, deposits over US$250,000 are not covered by insurance. However, the government said it did not consider this issue a priority. However, the ministry should have considered that the authorities would return to discussing new mechanisms to protect depositors in the future. The White House attributed its decision to the fact that the authorities have already taken measures to stabilise the situation after the bankruptcy of central banks. The government does not yet see a critical outflow of funds, but financial institutions consider introducing deposit insurance of all sizes necessary. This would prevent future problems with the financial system.
According to the source Bloomberg, the U.S. Treasury may resort to the assets of the Exchange Stabilisation Fund to insure deposits. Usually, its funds are used to buy and sell currency or investments. For the past few years, the Fed has used the fund’s assets as an emergency loan for banks.
The US financial system
The cause for concern for US financial institutions was the collapse of SVB Bank in March 2023. It was considered one of the key lenders to companies in the IT sector and was valued at US$40bn. Around 50% of the businesses that carried out IPOs in 2022 were clients of this bank. At the same time, the government is working to find a way out of the situation. Specialists are developing special measures to support depositors of SVB and Signature Bank, which also declared bankruptcy.
After the bankruptcy of SVB, experts analysed the financial system’s stability. If about half of the customers of SVB take their uninsured deposits, then about 190 American banks and deposits totalling US$300 billion may be at risk of collapse.
The US financial system is struggling with rising inflation and rising interest rates. These and many other factors have resulted in the market value of US banks being US$2 trillion less than the book value figure, which also takes into account loans in the repayment process. Overall, there has been a 10% drop in asset value. However, about 5% of financial institutions have experienced a 20% drop in value, which is highly detrimental to their operations and the system’s overall stability. According to the sector, deposit insurance would allow banks to feel more comfortable during difficult periods of instability.