May 16, 2020 / VOLUME NO. 105
A Former FDIC Chair Walks Into a Bank

It sounds like the start of a joke.

William Isaac, the chairman of the Federal Deposit Insurance Corp. during the savings and loan crisis of the 1980s, walks into a bank. It’s mid-March, and he wants cash.

He doesn’t take out a “massive amount” but “enough to get by for a month or so, if there was some problem or some issue in the economy, and the banks were not available.”

The former chairman of the insurance fund — who oversaw the closure of more than 1,000 institutions, including the first “too big to fail” bank — felt the need to withdraw cash as states began shutting down to slow the spread of the coronavirus.

That’s the joke.

“I wasn’t concerned about the banks; I know they’re safe, and what I took out was not nearly as much as I left in,” he says. “I just felt that stores may close, and banks may [reduce their] hours, and I wanted some cash on hand.”

Isaac felt the same impulse to hoard cash in a crisis that others have. The irony is that he, better than anyone, knows the consequences for banks if others follow his lead.

Too much hoarding leads to liquidity crunches in markets big and small. Enter the Federal Reserve Board and its alphabet soup of facilities.

“One thing the Federal Reserve does is trying to make sure that there’s so much money in the system that it will satisfy even the most conservative of people,” he says.

Isaac points out that regulators have never faced a crisis like this. The Fed was only five years old when the Spanish Flu broke out in 1918, and the FDIC wasn’t created until 1933.

“The Fed is basically creating pages in their playbook that nobody thought were there,” Isaac says.

It’s been two months since regulators opened their playbooks and pulled out their toolboxes, with several of the lending facilities they created already acquiring assets. This is on top of the billions that Congress has offered in two rounds of stimulus, with the potential for more.

Much uncertainty remains, but the outlook for financial markets seems to have reached a precarious equilibrium.

Now we wait. For people to get better. For cities and businesses to reopen. For it to feel safe to be near strangers again. For the toilet paper to return to shelves.

At least the banks (and William Isaac) are flush with cash.

•  Kiah Lau Haslett  / managing editor for Bank Director
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