(RPT)MNI INTERVIEW:Ex-FDIC Chair Downplays Bank Contagion Risk

(Repeats a story first published on March 24)

Bill Isaac, former head of the Federal Deposit Insurance Corporation, told MNI the failures of regional lenders like Silicon Valley Bank and Signature Bank are unlikely to lead to bigger problems for the U.S. financial system because authorities acted with alacrity to stem concerns.

"There's not much more to be concerned about as long as people are not seeing a potential for a lot more failures and right now I don't see a lot more," he said in an interview.

"I'm confident in the sense that we have large government organizations like the FDIC and the Fed and others that have the capacity to control almost anything in terms of having adverse effects in the financial system. They have a lot of authority to take steps, whatever steps are needed to keep things calm and under control."

That doesn't mean some other individual banks won't run into trouble, however. "I'm not going to be shocked if others come up," said Isaac.

DEPOSIT INSURANCE LIMITS

A temporary increase to the USD250,000 deposit insurance limit or marginally increasing the limit to keep track with inflation is appropriate, he said. But as some lawmakers propose 100% permanent deposit insurance, Isaac balked.

"You lose me and I hope the country will not support that because that is the fastest way to destroy the free enterprise system in this country," he said. "Deposit insurance is intended to protect the typical American family."

Still, all business transaction accounts that are non interest bearing should be paid in full, he added. "If you do those things, you've provided the liquidity that folks need and the rich folks end up taking a 10% or 20% haircut," said Isaac, who led the FDIC from 1978 through 1985, and worked closely with Fed Chair Paul Volcker.

"We can improve the system without destroying the discipline that needs to be there in our country, in our business community, and in banking."

INFLATION VS. CREDIT CRUNCH

The Fed's 25 basis point interest rate increase this week was the right step and projects confidence about the economy, he said. "It was the smartest thing they could have done to continue on their program," said Isaac.

Officials must now weigh their ongoing focus on inflation against worries that bank troubles could lead to a broad-based credit crunch.

The uncertainty generated by the bank failures and deposit movements are likely to cause banks to become more cautious on lending, with a risk that is heightened by the fact that mid- and small-size banks play a disproportionally large role in U.S. bank lending, he said. (See: MNI INTERVIEW: Powell Nods To Fed Pause But Keeps Options Open)

"Usually, when we have this kind of economic problem, people get cautious," he said.