Government Shares — Even Golden Ones — Will Not Stop Bank Failures
In yet another sign that the universe loves freedom, my latest Forbes column on the Silicon Valley Bank mess was published on the same day as Saule Omarova’s New York Times op‐ed. My column makes the opposite case as Omarova, which I’ll get to in just a bit. It also points out something that seems to be getting lost during these debates over whether to increase the FDIC insurance cap to more than $250,000: Omarova and her fellow travelers want the full provisioning of money by the government.
As I write in my piece:
Further, they want to “clarify banks’ place in U.S. society and their relation to the government,” such that all money becomes “a governmental product.” They actively hail a “new monetary era” with central bank digital currencies, a digital version of the dollar that ties citizens directly to the government. They want to transform the Fed into a provider of first resort instead of a lender of last resort.
In the New York Times, Omarova glosses over this issue and claims her nomination to lead the Office of the Comptroller was sunk because of her views on deregulation. Here’s the full paragraph:
The banking industry and its political allies waged a highly public campaign to block my candidacy and called my academic work, which examined the many failings of our financial system and called for stronger public oversight, “un‐American.” But what ultimately sunk my chances was the fact that I openly opposed loosening regulatory restrictions on America’s banks.
Perhaps someone did view her work calling for stronger public oversight as un‐American. But the real controversy was her work calling for “the complete migration of demand deposit accounts [at commercial banks] to the Fed’s balance sheet.” It didn’t help when she pointed out that the “compositional overhaul of the Fed’s balance sheet would fundamentally alter the operations and systemic footprints of private banks, funds, derivatives dealers, and other financial institutions and markets.”
It’s pretty convenient to leave out the complete overhaul of private financial markets and focus on looser regulatory restrictions.
Speaking of looser regulations, I’ve noted in Forbes (multiple times) and Cato at Liberty that the Economic Growth Act of 2018 didn’t really roll back much. The only thing it did was make a symbolic change to the threshold for enhanced supervision, from $50 billion to $250 billion. But the Fed maintained all the discretion they needed to regulate banks in the range from $100 billion to $250 billion more stringently if they thought it was necessary, and it’s not as if federal regulators couldn’t place activity restrictions on banks with less than $100 billion in assets.
Whether the 2018 changes had anything to do with Silicon Valley Bank’s failure is an open question, but it’s very difficult to make that case. Among other issues, it turns out the 2014 rules for one of the so‐called enhanced regulations, the liquidity coverage ratio, used a higher threshold of $250 billion from the very beginning (with a modified ratio at a lower threshold). Similarly, the 2014 rules for the Fed’s Comprehensive Capital Analysis and Review (CCAR), a close companion to the Dodd‐Frank stress tests, another of the so‐called enhanced regulations, also used the $250 threshold.
The threshold could have been lower, but the consensus leading up to the 2018 bill—Democrats on the Senate Banking Committee could have stopped the whole thing—was that the added regulations were redundant. And in the case of Silicon Valley Bank, at least through 2022, it had just as much equity and liquidity (if not more) than even the largest, most stringently regulated large banks.
Regardless, the threshold was always arbitrary. There was no objective reason to argue that a $50 billion bank was systemically important and a $25 billion bank (or two of them) wasn’t. In hindsight, it’s easy to argue the threshold should have been lower, especially after the government scared the daylights out of everyone by invoking emergency authority and making even uninsured depositors whole.
Of course, Omarova wants to undo the 2018 changes. But that’s not enough. What she really wants now is to have the federal government take a special “golden share” interest in “each individual bank above a certain size.” According to Omarova:
It would be structured to serve a single purpose: to give the American public a seat at the table where banks make decisions on how to manage—or perhaps not manage—the risks we ultimately may have to bear.
The “golden share” would also “allow the federal government to place one director on the bank’s board.” And while Omarova acknowledges that “This model may seem like government takeover to some,” she’s careful to point out “that’s not how it is designed to work.” Just in case, though, the “beauty of the golden share” is that it “can be tailored to serve any public goal.” (Ignore who gets to decide what the public goal might be.)
I won’t quibble over whether the golden share is government ownership. Either way, this idea puts too much faith in any individual to be able to recognize those “credible reasons to worry about the bank heading down a dangerous path” with, for example, “rapid growth in the riskiness or concentration of the bank’s assets or liabilities.”
The mechanism Omarova envisions is just another version of what we already have. Instead of a Federal Reserve or FDIC employee trying to stop things before they get out of hand, this person will be a federal official on the private bank board. Or maybe a Fed employee on the bank board? Either way, if it doesn’t work, the government could just take two seats on the board. That would be bulletproof.