Bill Ackman Urges for Temporary Systemwide Deposit Guarantee Until $250,000 Deposit Guarantee Program is Modernized

By Tsunami 03/14/23 1:04 AM

Bill Ackman, the CEO of Pershing Square, has called on the Federal Deposit Insurance Corporation (FDIC) to explicitly guarantee all deposits as a temporary measure to protect our community and regional banking system. He has warned that without such a guarantee, the system is at risk of more bank failures, which would have a profound and long-term impact on small and medium-sized businesses that rely on these banks for funding.

Ackman is calling for a temporary systemwide deposit guarantee that will remain in place until the current $250,000 deposit guarantee program is modernized. He believes that this new program is necessary to ensure that depositors have complete access to the total value of their deposits, and that non-systemically important banks (non-SIB banks) do not continue to experience large withdrawals.

The current deposit insurance regime, which has been in place since the Great Recession of 2008, is two-tiered. A few large banks have the explicit backing of the taxpayer, while the rest have $250,000 of deposit insurance. This system worked until it didn’t work, and Ackman argues that it is no longer sufficient to protect the banking system in the face of the current crisis.

Recent events have made clear in the mind of the average American that there is a risk that they could lose money doing something they used to think of as safe — Being a depositor. We have had a two-tiered system since the GFC where a few large banks have the explicit backing of… https://t.co/lcEbs3lEyv

— Bill Ackman (@BillAckman) March 13, 2023

In his view, a time-out is needed to give everyone confidence that their deposits are safe. The FDIC needs to explicitly guarantee all deposits now, and the government needs to be committed to preserving our system of smaller banks. While each small bank is not ‘systemically important’ like JPMorgan or Citigroup, collectively they are as, if not more, systemically important. Recent events have made clear in the mind of the average American that there is a risk that they could lose money doing something they used to think of as safe – being a depositor.

Ackman believes that the rewards for being a depositor are minimal compared with the risk of loss from losing access to funds needed to run your business or household. Until this problem is solved, our banking system is at risk. The more time the public is exposed to a period of uncertainty, the more imprinted deposit risk is on the mind of the public.

The alternative to a temporary systemwide deposit guarantee, according to Ackman, is one bank failure after the next. The weakest three have already fallen, and the market is already telling us who is number four. This is not the way to maintain confidence in a banking system.

Ackman’s call to action comes at a time when many small and medium-sized businesses are struggling to stay afloat, and are turning to their banks for help. These banks play a critical role in providing funding to these businesses, and without them, the cost of capital for small and medium-sized businesses could rise, further damaging the economy.

The stock market is already reacting to the possibility of more bank failures, with regional bank stocks trading at bargain prices. Ackman sees this as an opportunity for investors, but he acknowledges that there is real risk involved. He has decided not to participate in buying regional bank stocks or ETFs, as he wants to continue to be part of the conversation and be able to share his views without the typical accusations against investors who share their views while having a trade on.

Overall, Ackman’s tweets highlight the urgent need for action to preserve public confidence in the banking system. While the call for a temporary systemwide deposit guarantee may be controversial, it reflects the growing concerns about the stability of smaller banks and the need for a more modern deposit insurance regime.

Ackman, one of the prominent figures calling for government intervention to support SVB, is joined by billionaire Mark Cuban, who suggests that the US government should buy back all of SVB’s debt. On Saturday, Nobel Prize-winning economist Paul Krugman commented on the strength of SVB, stating that it nurtures and supports relationships in Silicon Valley. Krugman also noted that this situation is not comparable to the collapse of Lehman Brothers during the 2008 financial crisis.

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