Former FDIC chair warns banks to fall 'like dominoes' without gov't help
People walk past the U.S. Department of Treasury building, March 13, 2023. /CFP
People walk past the U.S. Department of Treasury building, March 13, 2023. /CFP

People walk past the U.S. Department of Treasury building, March 13, 2023. /CFP

A former Federal Deposit Insurance Corporation (FDIC) chair warned on Friday that banks would collapse like dominoes for lack of more government bailouts following the abrupt fall of Silicon Valley Bank (SVB) and Signature Bank.

Sheila Bair said the government actions following the fall of these two banks create "moral hazard," which is the expectation of further bailouts, during a Fox Business interview on Friday.

"I think this is more of a Bear Stearns moment," said Bair. Bear Stearns was one of the first banks to be engulfed in the 2008 financial crisis, six months before Lehman Brothers failed.

Bear Stearns escaped bankruptcy with U.S. government support, releasing a signal that the government will back up banks. Bair said that this message seized up the banking system, and Lehman Brothers went down when the government stopped bailing out.

The recent failures of SVB and Signature Bank have caused a crisis of confidence in the industry. Bair said that the fear is growing and spreading thanks to "mass confusion" caused by government actions.

She said continued bailouts will "provide a blanket guarantee temporarily" which is necessary in avoiding additional banks to fall like dominoes.

"As much as I hate to say it, [the government] may need to do more bailouts, not less through the system," said Bair.

Separately, a coalition of midsized U.S. banks has in a letter asked the FDIC to insure all of their customers' deposits for the next two years, that’s above the current $250,000 limit, to avoid contagion after SVB's collapse.

The Mid-Size Bank Coalition of America (MBCA) argued that the broadened coverage of deposit insurance would "immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce chances of more bank failures."

In a most recent study published on Monday, economists find that 186 U.S. banks may be prone to risks similar to SVB. In a paper submitted to the Social Science Research Network, economists from universities including Southern California and Northwestern wrote that data suggested that the recent Fed rate hikes have "very significantly" increased the fragility of the U.S. banking system.

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