It’s sometimes hard to figure out who we should be rooting for during a movie. Good writing pulls the audience’s emotions in different ways, making us question and doubt which character should come out on top when dealing with the moral dilemmas in the story.
While my intent isn’t to draw parallels between the world of finance and skillful short story fiction writing, it is important to understand the role of various financial institutions and entities that can have a large impact on macroeconomic policies and the people these policies aim to service. This is sometimes hard to do given the narratives that are portrayed of these entities depending on the media outlet that is outputting the news headlines. Is the Federal Reserve competent in interest rate policy? Does the treasury understand the growing debt levels in the US? Do banks deserve “get out of jail” free cards in the event of insolvency? What may seem like obvious policy errors or nefarious policy decisions on the surface may very well reflect the lack of understanding of the purpose of these institutions, the subject matter expertise that exists within these entities doing the decision making, and the purposeful and intended messaging to the general public that these entities provide to avoid panic and irrational responsive decision making.
One of the many common finance world themes in 2023 has been the role of the FDIC and treasury when it comes to regulating banks and other financial institutions in the US. The extent of regulation and purpose of banks has really come into question from many people and media outlets following the collapse of several US banks in 2023, namely Silicon Valley Bank, Silvergate Bank, and Signature Bank to name a few (First Republic Bank too just recently, although JP Morgan is buying them for a steal of a deal!). Criticism has come around the precedent that is set by financial regulators when banks are allowed or not allowed to fail, and how that may motivate financial institutions to behave in the future regarding risk management policy, lending practices, and leverage. To inform your own opinion around whether such criticism is warranted, let’s take a dive into what the FDIC is and what it does, and the importance of engagement with the US Treasury and Federal Reserve when it comes to managing financial institutions.
The banking industry is the backbone of any economy, providing individuals and businesses with access to credit and a safe place to store their money. Regulation of the banking industry is crucial in both Canada and the US. Without proper oversight and regulation, the banking industry can become unstable, leading to financial crises like the one that occurred in 2008. The regulation of banks helps to ensure that they are operating in a safe and sound manner, and that they are not taking on excessive risk that could lead to failure.
The Federal Deposit Insurance Corporation, or FDIC for short, is an independent agency of the federal government responsible for insuring deposits in banks and thrift institutions. Established in 1933 in response to the widespread bank failures of the Great Depression, the FDIC was created to restore public confidence in the banking system and protect depositors in the event of bank failures.
The FDIC’s primary role is to provide guidance and oversight to help ensure the safety and soundness of the banking system. It does this by providing deposit insurance to protect depositors in the event of bank failures. This means that if a bank or thrift institution fails, the FDIC will step in to insure depositors for up to $250,000 USD per account (as of April 2023). The FDIC also has the authority to take over failed banks and manage their assets.
The financial crisis of 2008 was a wake-up call for regulators and the banking industry as a whole. In response, there have been significant improvements in the way that banks are regulated and the level of oversight provided by regulatory bodies like the FDIC. One of the most important changes was the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act in 2010, which established a framework for enhanced oversight and regulation of the financial industry. The act also created the Consumer Financial Protection Bureau to protect consumers from unfair and deceptive practices in the financial industry. New regulations were put in place to increase the amount of capital that banks must hold, which helps ensure that they can weather economic downturns. Additionally, the FDIC now conducts stress tests on large banks to assess their ability to withstand adverse economic conditions.
So how does the role of the FDIC correlate to that of the Federal Reserve and Treasury?
The Treasury is responsible for managing the government's finances and overseeing the nation's monetary policy. According to the US treasury government website, the Treasury is a critical piece to the US financial infrastructure given it’s many roles such as “the production of coin and currency, the disbursement of payments to the American public, revenue collection, and the borrowing of funds necessary to run the federal government”.
The Federal Reserve, or the “Fed”, on the other hand, is responsible for implementing that monetary policy and regulating the banking industry. The Fed is widely known for making interest rate policy decisions based on their assessment of the macroeconomic picture, which would include factors such as GDP and inflation. Together with the Treasury, the Fed works with the FDIC to provide a safety net for the banking industry and protect consumers in the event of a financial crisis.
In conclusion, the FDIC plays a crucial role in insuring deposits and maintaining the stability of the banking industry. Proper regulation of the banking industry is necessary to prevent financial crises, and significant improvements have been made to the industry since the financial crisis of 2008. The Treasury and Federal Reserve also play important roles in conjunction with the FDIC in ensuring the safety and soundness of the financial system. Like the protagonist in the play, it’s important to look at the macro landscape and the dilemmas at hand when trying to understand the motives and decision making of the FDIC when it comes to regulating the banking industry.
Because without proper regulation, the banking industry can become unstable and put the entire economy at risk. Then who do we really root for?