U.S. Sen. Sherrod Brown, D-Ohio, says banking deposit reform should aim to prevent people from fleeing from community banks to larger banks. (Screenshot | U.S. Senate Committee on Banking, Housing, and Urban Affairs hearing)
WASHINGTON DC — Members of the Senate banking committee are exploring the pros and cons of reforming deposit insurance, which has been a topic of debate among policymakers since the aftermath of bank collapses earlier this year.
The Federal Deposit Insurance Corporation (FDIC) insures each depositor for up to $250,000 — a fact that took on renewed importance when the public learned about the collapse of Silicon Valley Bank, where more than 90% of deposits were uninsured. To prevent further disruption to the economy, President Joe Biden announced after runs on Silicon Valley Bank and Signature Bank that all depositors would be covered, even if their deposits were above the limit.
The Treasury Department, FDIC, and the Federal Reserve’s joint statement on the decision to cover those depositors explained at the time that this would “ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses …”
Now the Senate Committee on Banking, Housing, and Urban Affairs is weighing whether or not to increase the insurance limit, use a more targeted approach to ensure that certain accounts have more coverage, or embrace universal coverage. The FDIC can’t make these changes on its own. Congress would have to intervene to make these reforms possible.
At a hearing Thursday, Ohio Democratic Sen. Sherrod Brown, chair of the committee, said that with decades of banking consolidation, consideration of deposit reform should aim to prevent people from fleeing from community banks to larger banks that they consider safer.
He added, “Deposits serve a critical function in our banking system and economy. They are the source of our money supply and the financing that banks use to make loans to middle and working class Americans looking to buy a home or start a business … We also need to make sure that the rules banks have to follow to prevent bank failures are strong enough too.”
Sen. Tim Scott (R-SC), who repeatedly said social media played a large role in the bank collapses, criticized the idea of lifting the cap.
“Increasing benefits almost always sounds good, especially if there’s no downside or cost associated with increasing the benefit,” he said. “With the FDIC, if you increase the amount of deposits that are exposed to insurance then you have to increase the percentage of those deposits held by the FDIC. There’s always an offset to the new benefits. Someone has to pay for it.”
In response to Scott’s remarks, witness Andrew Olmem, a partner at Mayer Brown, who, according to the law firm’s website “played a key role” in passing the CARES Act and championed the 2018 bank deregulation bill as a member of the Trump administration, argued that these changes could create “competitive disadvantages in the marketplace” for responsible bankers.
Another witness, Emily DiVito, senior program manager for corporate power at the Roosevelt Institute, wrote a report on options for reform. One possibility expands insurance for only large business accounts and another provides unlimited coverage and also calls for a system where banks are regulated as investor-owned public utilities. Another possibility would be to keep the status quo but make small changes such as indexing the coverage cap to inflation and adding emergency expansion powers.
The FDIC released a report in May that favored expanding insurance for business payments accounts. It described targeted coverage as “the most promising option to improve financial stability relative to its effects on bank risk-taking, bank funding, and broader markets.”
Sen. Elizabeth Warren (D-MA), who expressed support for raising the insurance cap in the wake of the March bank collapses, asked DiVito, “If we could provide a little more reassurance to the business and nonprofit depositors that their money will be protected by raising the insurance cap in the smaller banks, do you think they would be less likely to flee those smaller banks whenever they hear rumors of stress in the banking industry?”
DiVito replied, “Yes, ma’am that’s generally how deposit insurance works. The more money you know is safe, the less worried you are about it being at risk and less inclined you are to engage in a bank run.”
Warren said it’s time to reform the deposit insurance system.
“We should do three things,” she said. “Raise the FDIC limit so that businesses can bank with community banks without the threat of business interruption during a crisis. Second, make the too-big-to-fail banks and banks with the highest levels of uninsured deposits cover more of the cost of insuring stability of banking system and FDIC insurance fund, and third, tougher oversight to ensure that banks don’t take advantage of this additional insurance and engage in riskier behavior.”
In response to the failures of Silicon Valley Bank and Signature Bank, several bills focused on banking have been introduced in Congress this year, but none have come to a floor vote.
Todd Phillips, principal with Phillips Policy Consulting and a fellow with the Roosevelt Institute, told States Newsroom that he’s in favor of the FDIC-supported concept.
“I think that if we did that, it would prevent the types of runs we saw with Silicon Valley [Bank] and make sure that people realize that for transaction accounts, your money is safe,” he said. “But if you put your money in a savings account, we’re going to treat it like an investment and people should understand that they have the potential to lose money with that.”
DiVito said that the run on Silicon Valley Bank raised questions over whether both of the functions of deposit insurance were tailored to today’s times.
“Deposit insurance has two primary objectives. One is to protect small dollar depositors — people who have money in the system and deserve to have it protected …,” she said. “But the second main function is stabilizing the U.S. financial sector system. That obviously has benefits for every individual family and community in this country, so they’re both linked. … This past spring, it seems to be the case that even though there are relatively few uninsured depositors, they can trigger destabilizing runs that threaten the macro economy for everybody.”
As lawmakers consider how best to regulate banks to prevent future bank runs while ensuring that the average person isn’t hurt by banking instability, bank regulators are expected to release new regulations on capital requirements. The Comptroller of the Currency, Federal Reserve, and FDIC will likely share the changes on July 27, according to Bloomberg. Michael Barr, vice chair for supervision at the Fed, said in a July 10 speech at the Bipartisan Policy Center that the risk-based requirements, which are intended to protect investors, financial firms, and the overall economy, “should be updated to better reflect credit, trading, and operational risk.” Barr said he would recommend that capital rules apply to banks that have $100 billion or more in assets.
Phillips said he isn’t sure if the capital rule will target exactly what happened at Silicon Valley Bank but that it’s good news for policymakers that wanted to restore regulations that were rolled back during the Trump administration, particularly under the 2018 bank deregulation bill.
“During the Trump administration, when Congress passed the [Economic Growth, Regulatory Relief, and Consumer Protection Act], the Trump regulators used that law to roll back regulations and oversight and it’s been really clear from the beginning of the Biden administration that regulators wanted to undo those rollbacks,” he said. “Now that Michael Barr is in place and now that the three banking agencies are run by Biden appointees, I think they finally have the personnel in place to actually go about doing that.”
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