The 2023 decision by banking regulators to invoke a systemic risk exception to protect uninsured deposits following the Silicon Valley Bank and Signature Bank failures likely prevented further instability in the U.S. banking system, the Government Accountability Office said today in a new report.
Under a systemic risk exception, the FDIC can provide emergency assistance when resolving a failed bank if the failure is likely to result in widespread financial instability. The decision is made in consultation with the Federal Reserve, Treasury Department and the president. The 2023 decision was made with the stipulation that the GAO later review the FDIC’s actions.
The GAO analyzed several financial and economic indicators to determine the effects that the bank failures had on the financial system and whether FDIC’s actions mitigated those effects. It concluded that the agency’s actions probably helped prevent further financial instability. For example, deposit outflows from commercial banks other than the 25 largest banks slowed in the week after the bank failures and stabilized the following week. “How these indicators would have performed without the systemic risk exception is unclear,” the GAO said.
Still, the GAO noted the possible downsides of invoking a systemic risk exception, pointing to research indicating that protecting all deposits can create moral hazard by reducing incentives to manage risk. “Financial regulatory reforms proposed by regulators and introduced in Congress, including changes to deposit insurance and to capital requirements, may help address these concerns,” the GAO said.
