The Biden administration is under mounting pressure to call for an expansion of the federal guarantee on bank deposits to shore up confidence in the financial system and prevent further distress among US regional banks.
The Federal Deposit Insurance Corporation, which is funded by banks, guarantees deposits up to $250,000. But a growing chorus of influential bipartisan lawmakers and banking industry lobbyists have been pushing for that limit to be increased or suspended.
“I think that lifting the . . . cap is a good move,” Elizabeth Warren, the Democratic senator from Massachusetts, told CBS on Sunday. “Is it $2mn? Is it $5mn? Is it $10mn? Small businesses need to be able to count on getting their money to make payroll, to pay the utility bills. Non-profits need to be able to do that,” she added.
The Biden administration is being forced to consider additional measures to protect the banks after the actions it took last week — including guaranteeing all deposits at Silicon Valley Bank and Signature Bank, and a the Wall Street-led deposit infusion into First Republic Bank — failed to reassure investors on Friday.
Biden administration officials have not ruled out the possibility of calling for a broadening of the FDIC-insured deposit limit, which would require congressional approval, nor have they taken a position on it. The White House and Treasury declined to comment on Sunday.
Any move to expand the FDIC deposit guarantee would have to be weighed against concerns that it might encourage risky behaviour by banks, as well as the cost to banks and consumers, since it would probably be accompanied by higher fees. Rather than a short-term fix, it may be part of longer-term reforms debated following this week’s turmoil.
“All options should be on the table, and that’s how I’m approaching it. But if we do this, we have to understand their trade-offs. It is not a pure play of allowing a larger set of insurance coverage. It costs the financial system significantly — and especially community banks. We need to look very carefully at this,” Patrick McHenry, the Republican chair of the House Financial Services Committee, told CBS.
At the end of last year, the amount of insured deposits in all FDIC insured institutions nationwide was just over $10trn, or about half the total deposits nationwide.
A spokesperson for Sherrod Brown, the Democratic chair of the Senate banking committee, told the FT: “Senator Brown believes American workers and their families should not pay the price for other people’s risky bets that don’t pay off — whether on Wall Street or in Silicon Valley. Any changes made to deposit insurance must protect small businesses and workers, not big investors.”
The push to expand FDIC insurance reflects the fragmented landscape of the US banking industry, with almost 4,000 lenders estimated to be supervised by the Federal Reserve.
While almost half of the industry’s $31.4tn in assets are concentrated with the so-called global systemically important banks such as JPMorgan Chase and Bank of America, trillions of dollars are with thousands of smaller lenders.
Some 99 so-called regional banks with between $10bn and $100bn in assets have $2.7tn in assets, while about 3,500 “community banks” each with less than $10bn in assets collectively have $2.8tn in assets, according to CFRA, a data and research service.
A coalition of US midsized banks has already written to regulators asking them to extend insurance to all deposits for two years. “Doing so will immediately halt the exodus of deposits from smaller banks, stabilise the banking sector and greatly reduce chances of more bank failures,” the group wrote, according to Bloomberg News.
A group representing smaller banks said it was important regulators did not pick “winners and losers.”
“If the FDIC decides to provide unlimited deposit insurance for some institutions, even on a limited basis, they cannot discriminate and leave others out, particularly those that have been operating on a safe and sound basis — such as the nation’s community banks,” said Anne Balcer, senior executive vice-president of the Independent Community Bankers of America.
Janet Yellen, the US treasury secretary, has faced criticism after telling Congress last week that uninsured deposits could only be guaranteed if US officials and regulators determined that there was a systemic risk to the financial system, as happened with SVB and Signature.
Analysts at Jefferies this week said that loans made by the Fed to banks in need of short-term cash, along with other actions by the Treasury and FDIC, should help ensure that further deposit withdrawals would not lead to further bank failures. However, Jefferies analysts argued that current events foreshadowed a potential credit crisis for small businesses in the near future.
“The regional banks that have [fuelled] the small business boom that has been ongoing since the pandemic will be far more limited in their ability and willingness to lend, irrespective of their deposit stability or access to liquidity from the Fed,” Jefferies wrote.
Additional reporting by Colby Smith in Washington