Activist investor calls for biggest depositors to pay insurance fees to help safeguard smaller lenders
Activist investor Nelson Peltz has warned that First Republic may not be the last regional US bank to fail as he renewed calls for deposit insurance to be extended to safeguard regional lenders.
Peltz, the co-founder and chief executive of Trian Fund Management, told the Financial Times that depositors with more than $250,000 in a US-accredited bank should pay a small insurance premium to the Federal Deposit Insurance Corporation.
The funds from these fees would be used to insure deposits larger than the current threshold of $250,000 covered by the FDIC, helping to prevent outflows from regional banks to larger lenders such as those seen in the recent banking turmoil.
“It should stop the deposit outflow from the small regional and community banks,” Peltz said. “I don’t think we want all of the funds just going to major banks.”
The growth of digital banking and the speed at which a crisis in confidence can proliferate across social media has made lenders far more vulnerable than in the past to a run on the bank if depositors lose confidence.
Bank runs have brought down three US lenders since March: Silicon Valley Bank, Signature Bank and First Republic. The latter was put into receivership early on Monday in a deal that will result in JPMorgan Chase taking over most of the failed company.
The rescue of First Republic did not arrest a sell-off in regional bank shares as investors looked for other weak links in the system. On Wednesday, PacWest said it was reviewing strategic options amid the worst industry turmoil since 2008.
“I don’t have a crystal ball and I don’t know what the balance sheets of these banks look like,” said Peltz. “If this stops with First Republic being acquired by JPMorgan, I would be happy, but it may not.”
There are more than 4,100 commercial banks in the US, according to the FDIC.
“We’re one of the few countries that has a large infrastructure of small regional and community banks,” said Peltz. “They have filled the needs of small businesses for well over a hundred years — I believe we can’t afford to let them go.”
“I believe regional banks are the backbone of many companies and real estate across the US,” he added. “This is the way to give them continued influence and strength.”
Peltz is best known for his activist campaigns at companies such as Disney, Procter & Gamble and Unilever. Trian doesn’t own any banks but holds positions in asset managers Janus Henderson and Invesco.
The billionaire investor said that a secondary effect of his proposal would be to attract flows of capital into the country and “help the dollar to remain as the [world’s] fiat currency. I think that’s important for all of us in the west.”
“I believe you could see many legal currencies coming into the US, whether it’s euros, pounds or yuan. These deposits would find their way to a US bank and be put into US dollars. As an American, that makes me happy,” he added.
Peltz’s proposal comes as US financial regulators are looking at ways to try to reduce the risk of bank runs. Earlier this week the FDIC recommended partly revamping American deposit insurance to increase coverage for day-to-day business accounts as one way to do this.
The FDIC did not specify in the report how much the coverage cap should be raised for business transaction accounts. But it calculated that raising it to $2.5mn would probably cover what most small and medium-sized companies needed to keep in their accounts to cover payroll.
Raising the overall limit or adding targeted coverage would require congressional approval and would increase the fees charged to banks for participating in the insurance programme.
Copyright The Financial Times Limited 2023