Smaller American banks have a bigger problem. For now, their focus is on survival. That’s why the U.S. Mid-Size Bank Alliance has called for an expansion of deposit insurance to tighten outflows. However, even after the stability, there will be a big decrease in the ability of regional banks to give loans. It hurts the US economy.

The Request to extend federal deposit insurance To accumulate more than $250,000 for the next two years shows that the distrust of American banks has its own momentum. MBCA argues that this move will immediately stop the exodus of deposits.

It should not have come this far. Opponents of risk-free deposits worry about moral hazard.

Temporary guarantees may also be required. Former FDIC Chair Sheila Bair says A flight of deposits can make big banks even bigger, while otherwise healthy lenders get into trouble.

Regulators and politicians will do their best to avert that threat. As well as potentially extending deposit insurance, they are providing access to sufficient liquidity. Even if they manage to quell the immediate crisis, small US banks will bear the brunt.

The issue is not just that regional banks’ advantages over larger rivals – more liberal regulations and lower capital requirements – are likely to be reconsidered. Some deposits transferred during the current panic are also non-refundable.

If regional banks have a small “sticky” deposit base left, they can, in theory, receive liquidity from the Fed’s bank portfolio funding program. However, its relatively high cost – a one-year overnight indexed swap plus 10 basis points – makes it an unattractive source of new debt, Jefferies analysts say.

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This points to a credit crunch on Main Street, not Wall Street. Regional banks helped drive the small business boom. Their willingness to lend had already disappeared before the latest bank was up and running. Extending the guarantee on deposits will shore them up. It won’t prevent the coming credit crisis, but it will make it less severe.

The Lex team is interested in hearing more from readers. Please tell us what you think about extending the deposit guarantee in the comments section below.


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