Billionaire hedge fund founder Bill Ackman called for a “systemwide deposit guarantee regime” in the U.S., as regional banking stocks were pummeled in the wake of this weekend’s sale of First Republic to JPMorgan.
“The regional banking system is at risk,” the founder and CEO of Pershing Square Capital Management tweeted on Wednesday evening. “The [Federal Deposit Insurance Corporation’s] failure to update and expand its insurance regime has hammered more nails in the coffin.”
Regional banking shares fell on Wednesday, led by California-based PacWest Bancorp, whose stocks fell by over 50% in after-hours trading, following media reports that the company was considering a sale. Late Wednesday, PacWest confirmed that it was in discussion with partners about strategic options, and that it had not seen “out of the ordinary deposit flows” since the weekend.
“Banking is a confidence game,” Ackman wrote on Twitter. “At this rate, no regional bank can survive bad news or bad data as a stock price plunge inevitably follows.”
Regulators and Wall Street CEOs hoped First Republic Bank might have marked the end of the confidence crisis in the banking sector. On Wednesday, U.S. Federal Reserve chair Jerome Powell suggested that the takeover would help “draw a line” under the current turmoil.
Deposit insurance
Ackman suggested on Wednesday that First Republic Bank “would not have failed if the FDIC temporarily guaranteed deposits while a new guarantee regime [was] created.”
The hedge fund manager has consistently supported stronger government intervention in the banking sector since turmoil began in early March, calling for a government bailout of Silicon Valley Bank when customers first started to abandon the struggling lender.
On March 12, U.S. regulators took over both Silicon Valley Bank and Signature Bank of New York, and pledged to protect deposits at both institutions in full, rather than just up to the $250,000 normally protected by insurance.
Despite an early flurry of interest in expanding deposit insurance after SVB’s collapse, energy to change regulations has cooled. U.S. Treasury Secretary Janet Yellen gave mixed messages in late March about whether the administration was considering blanket deposit insurance. There’s also a lack of consensus in the policy space, with conservative groups worried that broader insurance would encourage risky behavior by banks, and progressive groups choosing to focus on other issues like executive compensation.
On Monday, the FDIC recommended that Congress allow the agency to guarantee more deposits. The regulator suggested that it could offer more protection for payment accounts held by businesses, which would use deposits for employee wages.
Yet the FDIC stopped short of recommending a broad expansion of deposit protections owing to worries about “moral hazard,” referring to the economic concept that insurance causes people to act in riskier ways.