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- US authorities could help ease bank concerns by protecting all depositors at mid-tier banks, Mohamed El-Erian said.
- Widespread consolidation in mid-tier banks would not be good as smaller lenders serve local needs.
- One economic analysis finds 186 banks vulnerable to failing like SVB should depositors rush to withdraw funds.
Anxiety about the US banking system following the implosion of Silicon Valley Bank could be lessened if regulators extended the protection given to SVB depositors to those at regional banks nationwide, according to economist Mohamed El-Erian.
"I got lots of phone calls over the weekend from people with deposits in these banks. And I kept on telling them, 'Your deposits are safe,' and then they said, 'Well, what do I lose if I just move them to a bigger bank that's too large to fail?' And it's very difficult to counter that argument," El-Erian said in a Sky News interview on Monday.
Shares of First Republic Bank and other mid-tier lenders were slammed lower over the past week on worries the companies could experience bank runs like the one that crippled SVB after depositors were spooked by its $1.8 billion loss on a massive bond sale.
Regional bank stocks continued to be hit even after the Financial Deposit Insurance Corporation and others authorities said they would "fully protect" all depositors who had funds in Silicon Valley Bank beyond the FDIC's $250,000 limit per account.
Should deposits stream out of mid-tier banks, that will lead to damaging consolidation in the US banking sector, said El-Erian.
"The US banking system relies on these regional banks and the smaller banks to serve local and regional needs. So it's not a good thing. I think you can stop this process from destabilizing by simply saying that the deposit insurance that was given to the depositors at Silicon Valley Bank is now available to all banks."
The collapse of SVB and Signature Bank left more than $200 billion in cash deposits looking for a new home, and big banks seen as "too big to fail" such as Bank of America and JPMorgan were expected to be among the top beneficiaries of inflows.
Mid-tier banks will likely suffer deposit outflows, "but not for any reason to do with them," Allianz's chief economic advisor said.
"They just happen to be in the wrong neighborhood. And I think the authorities need to move really quickly. And it's very easy to do - you formalize what you did for Silicon Valley Bank for these other banks."
There are 186 US banks that face risk of collapse like SVB should their depositors rush for withdrawals, according to findings by economists in a paper posted on the Social Science Research Network.
First Republic last week landed a $30 billion rescue package from a group of 11 banks led by JPMorgan and Bank of America. Its shares dropped Monday after S&P Global Ratings downgraded the San Francisco lender's credit rating further in so-called junk territory, saying the package may not be enough to resolve its liquidity and other challenges.
But PacWest and Western Alliance Bancorp shares were moving higher early Monday.