Why Bill Ackman is wrong and Janet Yellen is right

During the week gone by, Bill Ackman of Pershing Square urged Janet Yellen to offer full insurance on all bank deposits. He expressed apprehension that without such an assurance, there could be flight of bank deposits. He is wrong.

What is this controversy about?

In the aftermath of the banking crisis in the US, triggered by SVB, Signature Bank and First Republic Bank; top hedge fund manager, Bill Ackman urged the US state to give 100% deposit insurance. Big banks like SVB and Signature Bank had faced a huge flight of deposits and had to resort to sale of bonds at losses to repay these deposits. When they did not raise enough capital to fill the gap, the banks collapsed. Janet Yellen, the Treasury Secretary, has been unwilling to commit on 100% deposit insurance, and has been at best evasive about it.

Currently, the Federal Deposit Insurance Corporation (FDIC) offers insurance of deposits in regulated banks. However, this is limited $250,000 per deposit in all banks put together for one person. The issue is that banks have to limit retail deposit accounts to that limit so that they remain inside the insured limit. In the case of SVB, majority of the deposits were of more than $250,000 and hence insurance will not be applicable. Janet Yellen’s contention is that this is a well thought out decision and risk assumed and hence it would be naïve to expect government to bail out such deposits.

Why Bill Ackman is wrong

The rule book is quite clear that the job of banking regulation is to protect the small investor or depositor, not the large companies and venture funds. In the case of SVB, accounts with more than $250,000 were of well informed people who do not really need protection. Bill Ackman is also wrong to suggest that such a move could lead to a flight of deposits. The story of SVB may be more of an outlier and cannot be taken as the benchmark for banking in the US. For most of the small depositors, there is still a lot of faith in the banking system and the deposit insurance, from that perspective is large enough. Ackman may be just about inflating the risks.

Why Janet Yellen is right?

Due to the sensitivity of the issue, Janet Yellen has not given official statement on the subject of deposit insurance. The problem in such issues is that trying to respond will only make matters worse. It could be negative if Yellen says that the US government will not insure all deposits. That could trigger a run on the deposits. However, if US government  just remains silent, there is unlikely to be any impact since the rule book is already explicit about the process to be followed in such cases. Yellen does not see any reason to make an exception in this case as it could set a precedent. Janet Yellen is right and she is also right in remaining silent on the issue.