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Regulators have just a few options at their disposal to address a nettlesome crisis of confidence in the banking industry, with some type of measure to protect all deposits attracting a growing number of supporters on Wall Street. While blanket coverage is unlikely to take hold, a program where depositors could pay a fee to protect money above the $250,000 FDIC insurance threshold could be more feasible. Billionaire hedge fund manager Bill Ackman made an impassioned plea for a depositor backstop in a tweet Wednesday. “Banking is a confidence game,” the CEO of the $18.5 billion Pershing Square Capital Management fund said in a post following the Federal Reserve meeting. “At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows, insured and uninsured deposits are withdrawn and ‘pursuing strategic alternatives’ means an FDIC shutdown over the coming weekend.” Ackman didn’t provide specifics on how he thinks a deposit guarantee program would work, but he said one is essential to restore investor confidence in regional banks. “We are running out of time to fix this problem. How many more unnecessary bank failures do we need to watch before the FDIC, @USTreasury and our government wake up?” he said. “We need a systemwide deposit guarantee regime now.” Fellow hedge fund titan Nelson Peltz, the Trian Fund Mangement co-founder, also suggested that depositors be required to pay a premium for anything above the $250,000 limit. “It should stop the deposit outflow from the small regional and community banks,” he was quoted saying in a Financial Times report . ” I don’t think we want all of the funds just going to major banks.” Insecurity over deposits has been at the center of the recent banking storm, which hit full force in early March during a run on Silicon Valley Bank. Worries over the bank’s liquidity caused depositors to begin withdrawing funds, which then caused the bank to have to sell long-duration assets at a loss to cover the deposits. SVB’s business model relied on large depositors whose funds were used to backstop loans to heavily leveraged tech companies. Fears over the safety of those deposits triggered an additional run that ultimately caused SVB’s collapse. When SVB and then Signature Bank failed, authorities stepped in to guarantee deposits while also maintaining that stock and bond holders would be wiped out. That has put pressure on midsize banks, and the S & P Regional Bank ETF has fallen 40% year to date. Other options Banking analyst Mike Mayo at Wells Fargo suggested said one alternative could be fully guaranteed deposits to $2 million, which he said is the average uninsured deposit per account. That would be along the lines of what the government did, albeit temporarily, after Lehman Brothers collapsed in 2008. Other options include a ban on short selling, which also has a financial crisis-era precedent, and fast-tracking merges like the one that saw JPMorgan absorb First Republic. Short sellers have ganged up on some regional banks on the prospect that even those that are rescued or merged will see stock holders wiped out. “Renewed stress among regional bank stocks after market close may cause [Washington, D.C.] to reconsider priorities,” Mayo said in a client note. That could be wishful thinking, though. Seeing bank equity holders take a beating during the current crisis isn’t like to be enough to cause Congress to act, said Ed Mills, Washington policy analyst at Raymond James. “Unfortunately, there is a significant disconnect between the renewed pressure on regional banks and DC’s posture,” Mills said in a note. “We do not anticipate DC to have a renewed urgency/set of new solutions unless things significantly deteriorate from here.” For his part, Fed Chairman Jerome Powell declared the banking system as a whole to be “sound” and said much of the work for addressing the problems that led up to SVB’s collapse would fall to Michael Barr, the central bank’s vice chair for supervision. “What we control now is make a fair assessment, learn the right lessons, figure out what the fixes are and implement them,” he told reporters at a news conference. “To me anyway, it’s clear that we need to strengthen both supervision and regulations for banks of this size.”
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