MNI INTERVIEW: Ex-FDIC's Bair Sees Limited SVB Contagion Risk

The collapse of Silicon Valley Bank is unlikely to create major waves of contagion or significantly disrupt the financial system as long as regulators manage the situation adequately, former FDIC Chair Sheila Bair told MNI on Sunday.

“It’s a USD200 billion bank in a USD23 trillion banking industry, so if handled with care, I don’t see it creating contagion,” she said in an interview.

“It would be good and I’m sure the FDIC is focused on this, declaring what the uninsured dividend will be tomorrow. It looks like the bank had some very high quality assets, so the recoveries for the uninsured could be substantial.”

She said SVB’s downfall was the product of a classic run on the bank as the firm faced USD42 billion in withdrawals in 24 hours.

“As far as I can tell, Silicon Valley Bank wasn’t insolvent. This was a bank run,” said Bair, who headed the FDIC during the financial crisis of 2008.

She does not expect the FDIC to raise its cap on insured deposits above the $250,000 threshold to prevent similar runs on other institutions.

“I don’t see there’s a need to do that right now. If tomorrow the FDIC can announce a significant dividend to the uninsured to give the cash they need to make payroll. It should be at least 50%,” she said.

WHITE KNIGHT

Bair said the best outcome, and one which the FDIC is likely still seeking, would be for regulators to find a buyer of last resort for the beleaguered bank.

“I really hope they’re looking for a buyer and I really hope they find one. That would be optimal if they could announce tomorrow they have a buyer and the buyer is protecting the uninsured, I think that would calm things down really fast,” she said.

“In situations like these there are no good options, only the least bad option. The advantage of getting a buyer to come in is you don’t need to protect the uninsured deposits and you also could guarantee seamless provision of services.”

Bair said she hopes these developments will prompt the Fed to think twice about pressing on with its aggressive interest rate hiking campaign, which has seen rates rise nearly 500 basis points in just a year.

“In December I said they should hit pause. They just need to wait, let this blow through. Accommodative policies create financial instability and then when you have to start tightening you can have a problem if not carefully managed,” Bair said.