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How ‘payment banks’ can prevent the next bank crash



At the heart of Silicon Valley Bank’s collapse were uninsured savers — specifically start-ups that have much more than the $250,000 insured limit and can’t get paid without access to their accounts. This is tempting given SVB’s inability to suggest that the insured deposit limit needs to be raised, but this decision creates new problems. The best approach for the US would be to follow the example of other countries and create “payment banks” that are virtually risk-free, highly regulated, and have access to the payment network. They will be a place where companies can place funds – such as venture capital investments meant to pay wages – without exposing themselves to the risks that conventional banks create.

The failure of Silicon Valley Bank highlighted the underestimated weaknesses of the US banking system. While banking crises have historically been linked to credit risk, the recent crisis of confidence has arisen from unrealized losses on safe-haven securities that have left savers anxiously seeking liquidity. The liquidation of these securities resulted in losses in current market prices and heightened the fears of these depositors, leading to a bank run.

While insured savers have little to worry about, the recent crisis has highlighted the critical role of large uninsured savers who are understandably prone to worry. They make up more $8 trillion — or about 40% of all US deposits.

And one concern in particular stands out: the prospect of many companies inability to pay wages was a critical aspect of this crisis, as it became clear that some uninsured depositors were business customers who could not pay their employees without access to their accounts.

The problem of uninsured deposits

As an emergency response, the FDIC needed to effectively remove the deposit insurance limit and declare troubled banks systemically important to restoring calm. This solution is problematic for many reasons. In the absence of many new rules, unlimited deposit insurance gives banks a terrible incentive. And the rules needed to dampen those dire stimuli could stifle risk in the economy as a whole.

A deeper solution to this problem lies in understanding the dilemma of uninsured savers and addressing their needs more directly. It is easy to portray the uninsured saver as a reckless risk seeker. who flutters between banks in search of profitability. This caricature does not deserve saving or much sympathy. But the reality is that many uninsured savers face a huge dilemma.

Consider the problem of wages in the private sector, which is more than $9 trillion in annual cash flows in the US only. Large sums of money must be deposited on a regular basis, and this money must be placed in a bank in order to access the payment system. These deposits simply have no alternative other than banks, and are therefore susceptible to banks lending or buying assets. with these large deposits. In this process, all of our paychecks are dependent on the decisions of the bankers, who can take these large, unstable deposits, risk them, and then socialize the losses when we are forced to withdraw deposit insurance.

The case of “payment banks”

The problem of uninsured savers is really a problem of access to the payment system – a system monopolized by central banks and then delegated to banks. The problem of wages is a prime example of this problem, since wage funds must necessarily be kept in banks, where they are exposed to the risks mentioned above.

happy, other countries began to look for ways to solve this problem. V Great Britain, AustraliaAnd Singapore everyone has been innovating and we can learn a useful lesson from their efforts. Basically, there are two possible solutions: allow non-banks access to the payment system, as the UK and other countries have allowed, or create banks that do nothing more than solve this “wage problem”. We prefer the latter.

To solve the problem of uninsured creditors without distorting incentives to take risks, the US should create a special class of banks called a “payment bank” that does nothing but process payments. Their deposit base will be large and potentially volatile, they will be highly regulated (even more so than money market funds), and they will not be able to take on credit or repayment risk. In short, they will accept payroll deposits and other such large B2B transactions and facilitate access to the payment system.

What will be the business model for these payment banks? There are two possibilities: they can make a safe profit by investing these deposits in the Federal Reserve at the federal funds rate, or they can charge their clients a very small fee for facilitating these large payments. Investing large amounts of these deposits for very short periods without risk can generate significant returns, especially in the current environment, and it is possible that some of this income may even be returned to depositors.

While we have characterized this as a wage problem, there are many other economic agents with large, unstable deposits who are just looking to get into the payment system. Consider a $100 million business that has $70 million in annual costs and prudently keeps cash equivalent to monthly expenses in the bank to cover payments. Alternatively, consider starting a venture capital or private equity fund that seeks to raise capital or use capital to acquire companies.

Currently, these funds must be accessed by traditional banks in order to access payment features. Indeed, this is precisely the business model for both Silicon Valley Bank and Bank of the First Republic. But every bank has such clients. Indeed, the broader scope of card payments is Where 9 trillion dollars in card payments must be routed to merchant bank accounts through merchant acquirers – has similar features.

By creating payment banks, large unstable deposits that far exceed any reasonable deposit insurance limit will find a suitable place in a highly regulated bank that carries virtually no credit or repayment risk and can facilitate their transactions. More importantly, the entire banking system will no longer bear the burden of these uninsured deposits and will be able to return to its core function of retail deposits and making sound lending and asset management decisions. And we can avoid lifting the limit on deposit insurance and turning all banks into systemic ones. In some ways, this solution is less ambitious and far more realistic than using stablecoins or central bank digital currency to facilitate B2B payments on alternative payment rails. In many ways, this idea reflects the principles of industrial power. clearing and settlement applied in financial markets to a wider range of payments.

The reality is that the US banking system has become much less dynamic since the global financial crisis. Almost no entrance. while number of US banks may be high compared to many other countries, the truth is that we do not need more traditional banks – we need different types of banks. Crises are terrible things to wasteand it could lead us to a much safer banking system by recognizing the problem of uninsured depositors and creating a home for them.

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Elizabeth Holmes files new jail reprieve application as she files appeal



Five weeks before she is due to appear in jail, Elizabeth Holmes has decided to remain free on bail as she appeals her fraud.

Founder of Theranos Inc. appeared Friday before U.S. District Judge Edward Davila in San Jose, Calif., who presided over a four-month trial in 2021 and sentenced her in November to 11 1/4 years in prison. incarceration for defrauding investors in her blood testing startup.

Holmes has already filed an appeal against last year’s jury verdict finding her guilty on multiple counts of investor fraud. This process can take up to two years.

The government has Holmes’ passport, she has two small children, her bail is secured by her parents’ only home, and she continues to work on new inventions, her lawyers argued in the lawsuit, adding that “there is nothing criminal or dangerous about an idea or a patent.”

Her lawyers say her appeal raises “substantial issues” of law or fact. “After a complex litigation, there are many such issues here, any of which – if decided in favor of Ms Holmes – would require a new trial,” her lawyers said in a statement.

At Friday’s hearing, Davila was most interested in the government’s argument, put forward in January, that there was a risk that Holmes would try to escape if she remained at large in light of what happened a year earlier: a one-way ticket to Mexico was bought in Holmes’ house. name during her trial and before she was condemned.

The ticket may “suggest that return plans are not yet in place,” the judge said.

Amy Saharia, Holmes’ attorney, told the judge that prosecutors knew about the plane ticket and were silent on the matter long before they raised any objections. She said the ticket shouldn’t be a problem because it was purchased for a wedding that she and partner Billy Evans were hoping to attend, Saharia said. “They hoped that she would be acquitted and that they could stay and relax,” she said.

Prosecutors allege that Davila already gave Holmes “enough” time to report to jail because she became pregnant with her second child between the jury’s verdict and sentencing.

At the hearing, Assistant U.S. Attorney Kelly Volkar said Holmes’s conviction changed the calculus. According to Volkar, the lengthy term that Holmes faces along with her impending prison sentence is a motive for escaping, as Holmes legally requires her to prove that she does not risk escaping. “She has an uphill battle here,” she said.

Davila also accepted the government’s argument that Holmes should pay about $800 million in compensation to investors who lost money in Theranos. Holmes argued that she did not have to pay anything because the investors did not rely on the fraud she was convicted of in making decisions.

The judge said he would make a decision on bail and restitution in the first week of April.

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