As the economic fallout from the COVID-19 pandemic continues, the issue of bailouts for struggling businesses has become an increasingly important topic. One proposed solution is a deposit-based bailout, in which banks would be required to hold a certain percentage of customer deposits as a safeguard against failure.
However, according to hedge fund manager Bill Ackman, this policy is “bad policy” and could create a false sense of confidence in regional banks. Ackman has warned that regional banks are at risk of failing if the economy continues to worsen, and that deposit-based bailouts are not a viable solution.
The problem with deposit-based bailouts is that they do not address the underlying issues that are causing the banks to struggle in the first place. For example, if a bank is having difficulty due to bad loans, simply requiring them to hold more deposits will not solve the problem. The bank may continue to make bad loans, and the deposits could simply be used to cover up those losses.
In addition, deposit-based bailouts could lead to a moral hazard, in which banks take on excessive risks knowing that they will be bailed out if they fail. This could eventually lead to a systemic collapse of the banking system, as more and more banks take on risky investments that eventually fail.
Despite these concerns, some regulators and policymakers continue to support deposit-based bailouts as a way to protect the banking system from collapse. However, Ackman and others argue that this is a short-sighted approach that ignores the root causes of the banking crisis.
Instead, Ackman has proposed a more comprehensive solution that would require banks to take steps to improve their financial health, such as reducing their exposure to risky investments and strengthening their capital reserves. This approach would not only help to prevent bank failures, but would also ensure that the banking sector is better prepared to weather future economic downturns.
As regional banks continue to struggle, it is clear that more needs to be done to address the underlying issues that are causing their difficulties. While deposit-based bailouts may provide a temporary reprieve, they are not a long-term solution. It is time for regulators and policymakers to take a more holistic approach to bank regulation and ensure that the banking system is strong and resilient in the face of economic challenges.