A quick comment from Craig as a lead up to our recent interview with Prof Jeremy Bulow at Stanford University on Narrow Banking…
Bank negative equity
The Federal Reserve can’t credibly stop the fight against inflation without proof that the banking system systematically has negative fair value equity – like SVB did in their SEC disclosures. 10-K reports for most banks do not report negative fair value equity in their disclosures. Either the disclosure notes are overstating fair value, which is an issue for the SEC to address, or the banking system in aggregate is not saddled with losses.
SVB created chaos because tech companies were afraid of losing access to the payment system to make payroll, not because of a possible 10-15% loss on uninsured deposits. Regulatory solutions which allow small businesses to have secure funds over the FDIC limit may get traction. The banking lobby is strong, but if high rates put more banks in distress other corporations will lobby to have unlimited risk free deposits.
Narrow banking for corporations is an alternative to a massive expansion of FDIC limits and more risk of government bailouts. It’s worth understanding a bit more about narrow banking in case the tech lobby or other powerful interest groups take it up as a way to protect their interests.