Securing the Banking Sector: Calls for Greater Intervention and Consumer Protection Amid Financial Crisis

The recent financial crisis, which resulted in the closure of several banks, including Silicon Valley Bank, has prompted Wall Street executives and banking analysts to advocate for increased intervention from U.S.regulators to enhance the security of the country's banking sector. Investor sentiment within the banking sector has significantly declined, evident in theLos Angeles-based PacWest's shares dropping by 40%. This trend is not isolated, as Western Alliances experienced a 60% drop in early May. Many experts believe that without federal interference, there is a substantial risk of further bank failures. 

The extent of federal intervention being demanded varies considerably, but most agree that expanding deposit insurance could have a significant impact on this financial crisis. The Federal Deposit InsuranceCorporation (FDIC) has indicated its contemplation of increasing the current deposit insurance cap from $250,000 per-person per-bank. However, this decision rests not solely with the FDIC but also requires congressional approval.Raising the deposit insurance level does raise some concerns, as former FDIC chair Jelena McWilliams warns that it could potentially increase the risk tolerance of these banks.

Congress and various regulators are cautious about making significant moves, given the relative stability of the markets in recent times.Regulators may offer other forms of assistance to banks, such as signaling the protection of bank equity holders or providing additional funding. The U.S.Treasury Department has closely monitored the situation and has stated that the banking system maintains sustainable liquidity, with stable deposit flows.Consequently, regulators are unlikely to make any drastic decisions unless the situation significantly worsens.

The recent situation has also resulted in negative consequences for the sector, with the practice of short-selling gaining prominence.Short selling involves investors profiting from betting against certain shares.As a result, law firms like Wahctell and Lipton have called for securities regulators to ban short selling. While the Securities and Exchange Commission (SEC) announced that it would not implement a ban, they are actively working to identify any misconduct. The SEC has collaborated with federal and state regulators to analyze the recent events and ensure that there was no market manipulation associated with the bank share drops.

In conclusion, the recent collapse of banks like SiliconValley Bank in March has triggered a cascading effect where depositors swiftly moved their funds to larger banks for better protection. This has created significant challenges for smaller banks, with irregular deposit flows. Regulators acted promptly to reimburse affected customers but concerns about potential collapses still persist among depositors. Many banking sector analysts believe that the only solution is to provide consumers with greater protection through the FDIC. However, it remains uncertain when or if such measures will be implemented.