Last week, we discussed what steps Congress might take to address the failures of three banks – Silicon Valley Bank, Signature Bank, and Silvergate Bank – and to protect other financial institutions. At that point, it was still too soon to conclude how federal lawmakers would react.
While we are still in the early days, with UBS’ purchase (bailout?) of Credit Suisse last weekend, and with some indications that consumers are fleeing smaller banks over worries about additional bank failures, the contours of what could be bipartisan agreement on one idea are emerging: raising the limit on what bank deposits the federal government will protect, whether temporarily or permanently.
Let’s discuss and take a look at what has transpired over the last seven days.
Credit Suisse (Almost) Fails and Americans Are (Really) Scared
When we published last week, Credit Suisse was teetering on the brink of collapse. To prevent its failure, the Swiss government over the weekend engineered UBS’ acquisition of the financial institution for a cool $3.2 billion.
Credit Suisse is one of the 30 global banks that international regulators have deemed globally significant. As such, over the weekend, regulators developed an emergency rescue under which Credit Suisse shareholders lost nearly $17 billion in equity and the Swiss central bank took on some of the risk associated with Credit Suisse’s assets. The deal represented the first merger of systemically important banks since the 2008 financial crisis.
While that deal took place across the pond, there was turmoil stateside too. Indeed, U.S. consumers spent last week fleeing many smaller, community-owned institutions.
While it is impossible to know how much money depositors have taken out of small- and medium-sized institutions over the last few weeks, as Reuters reported, “Shares of regional banks such as First Republic Bank, PacWest Bancorp, and Western Alliance Bancorp have plunged since the banking crisis started on March 8 with the collapse of Silvergate Capital Corp and intensified as U.S. regulators took over Silicon Valley Bank and Signature Bank .” Consumers are moving their assets to larger banks. Charles Schwab, for example, announced on Friday that it had seen “strong inflows” from clients in recent days. Indeed, between March 10 and March 16, customers brought $16.5 billion in deposits to the institution.
According to The New York Times an unnamed “chief executive of a bank with around $60 billion in assets” described the outflows of deposits, saying they were “largely pulled by nonprofit organizations and businesses too small to have a full-time chief financial officer.”
As if that was not enough, USA Today reported that a new study has determined 186 more U.S. banks are at risk of failure even if only half of their depositors decide to withdraw their funds.
Enter Washington banking lobbyists.
Small and Medium-Sized Firms Want Help
As we noted last week, currently the Federal Deposit Insurance Corporation (FDIC) insures up to $250,000 in deposits per entity
per institution for several types of accounts, including:
The protection does not apply to stocks, bonds, mutual funds, annuities, safe deposit boxes, or municipal securities.
As National Public Radio noted, in 1934, the year the FDIC was created, the agency covered accounts up to $2,500 for each depositor at an insured institution. But in July of that year, the number was doubled to $5,000. It has been increased six more times since then. The last time was during 2008’s banking meltdown when Congress more than doubled the limit from $100,000 to $250,000.
While the current $250,000 limit is more than enough to cover most depositors’ accounts, as noted above, that threshold was not enough to reassure some customers. Which is why smaller banks now want Congress to act to help reassure their customers.
As Bloomberg reported Saturday, the Mid-Size Bank Coalition of America has asked lawmakers to extend FDIC insurance to all deposits held at smaller financial institutions for two years to halt an “exodus” of funds from smaller banks. Officials from the Independent Community Bankers Association (ICBA) have suggested they support that move, but, as Politico explained, the ICBA also has argued small “community” banks should not have to pay fees associated with insuring bank deposits. (Financial institutions pay fees to the FDIC to insure customers’ deposits. No taxpayer funding contributes to the system.)
Indeed, ICBA President and CEO Rebeca Romero Rainey said in an interview that compelling community banks to pay would amount asking Main Street businesses to “cover[ing] the sins of the largest and riskiest institutions.”
Will lawmakers respond to these pleas?
Bipartisan Agreement on Raising FDIC Limit?
According to Politico, Senate Majority Leader Chuck Schumer (D-N.Y.) is not yet on board with raising the FDIC insurance limit. He told reporters that regulators have “done a really good job at stopping the contagion.” He did say “there’s more to do” and “we’re going to look at a lot of different things” — without specifying what those “things” are, however.
While Majority Leader Schumer may not be certain about what comes next, Democrats in general were coalescing last week around the idea of raising the FDIC limit. Sen. Elizabeth Warren, D-Mass., reiterated her support in a Sunday interview, in fact.
And now it appears that Republicans are open to the idea. Sen. Mitt Romney (R-Utah) has said he is willing to consider raising the limit and, in a Sunday morning television interview, House Financial Services Committee (HFSC) Chair Patrick McHenry (R-N.C.) said the same. (To be sure, Chair McHenry also offered reasons the limit should not be increased.)
Rep. Blaine Luetkemeyer (R-Mo.), who is a senior lawmaker on the HFSC, has suggested guaranteeing all deposits for 30 to 60 days could “calm the fears of these deposits leaking out,” but, according to The Hill, he also has said Congress needs time to assess the situation before taking action.
A former Trump administration official even lent his voice to the debate. According to Politico, Gary Cohn, who was director of the White House National Economic Council under the former president, suggested in an op-ed last week that FDIC insurance should be raised to as much as $10 million since “the reality that depositors cannot be expected to monitor the financial condition of banks as if they were sophisticated investors.”
Still, there are Republicans who are against the idea.
Roll Call reported HFSC member Rep. Ralph Norman (R-S.C.) said, “The Biden administration had a knee-jerk reaction to agreeing to pay above the $250,000 … It sets a precedent — and, in my opinion, a wrong precedent — to say you’re going to make good on all the loans if another bank follows suit.” Additionally, according to The Hill, the House Freedom Caucus has announced it will oppose any universal guarantee on bank deposits since it would encourages “future irresponsible behavior to be paid for by those not involved who followed the rules.”
That opposition has not kept one group of lawmakers from plowing forward.
According to The New York Times, Rep. Ro Khanna (D-Calif.) and other lawmakers “are in talks about introducing bipartisan legislation as early as this week that would temporarily increase the deposit cap on transaction accounts …” Rep. Khanna told The Times he is “concerned about the danger to regional banking and community banking in this country.” The congressman also reportedly said if regional banks lose deposits and people turn to large banking institutions, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.
U.S. regulators are not waiting.
While it will take an act of Congress (signed by the president) to permanently increase the FDIC limit, Bloomberg reported yesterday that officials at the U.S. Department of Treasury are looking into whether federal regulators have the authority to allow the FDIC to temporarily insure bank deposits above $250,000. That news came after Treasury Secretary Janet Yellen told the American Bankers Association that the U.S. government could secure all deposits, just as it did for Silicon Valley Bank two weeks ago, if smaller banks begin to see deposit runs.
The Biden administration has other ideas too.
White House Wants to Go Further
The New York Times reported last Friday that President Joe Biden has asked Congress to approve legislation that would give the FDIC increased authority to impose penalties on the executives of failed banks, including taking back their compensation, collecting civil penalties, and banning executives from working in the banking industry.
Remember: while the banking crisis of 2008 started under President George W. Bush’s watch, now-President Biden was in the White House as vice-president when Congress was dealing with most of the fallout. Critics from all sides of the political spectrum took the Obama-Biden administration to task for doing too much to protect big banks from failing while doing too little to punish the people who created the crisis.
While President Biden may be trying to right that wrong — and while we may see some harmony on raising the FDIC insurance limit — legislation to impose penalties on individuals will be much more controversial.
Still: controversial or not, it is hard to see this saga ending without Congress doing something.