Push to Insure Big Deposits Percolates on Capitol Hill
WASHINGTON — Lawmakers are looking for ways to resolve a major concern that threatens to keep the banking industry in turmoil: The fact that the federal government only insures bank deposits up to $250,000.
Some members of Congress are looking for ways to boost that cap, at least temporarily, in order to stop depositors from pulling their money out of smaller institutions that have been at center of recent bank runs.
Representative Ro Khanna, Democrat of California, 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, which are used for activities like payroll, with an eye on smaller banks. Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.
Others, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether.
Any broad expansion to deposit insurance could require action from Congress because of legal changes made after the 2008 financial crisis, unless government agencies can find a workaround. The White House has not taken a public position, instead emphasizing the tools it has already rolled out to address banking troubles.
Many lawmakers have yet to solidify their positions and some have openly opposed lifting the cap, so it is not clear that legislation adjusting it even temporarily would pass. While such a move could calm nervous depositors, it could have drawbacks, including removing a big disincentive for banks to take on too much risk.
Still, Senate staff members from both parties have been in early conversations about whether it would make sense to resurrect some version of the previous guarantees for uninsured deposits, according to a person familiar with the talks.
Even after two weeks of aggressive government action to shore up the banking system, jitters remain about its safety after high-profile bank failures. Some worry that depositors whose accounts exceed the $250,000 limit may pull their money from smaller banks that seem more likely to crash without a government rescue. That could drive people toward bigger banks that are perceived as more likely to have a government guarantee — spurring more industry concentration.
“I’m concerned about the danger to regional banking and community banking in this country,” Mr. Khanna said in an interview. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, 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. “This should be deeply concerning, that our regional banks are losing deposits, and losing the ability to lend, he said.
If passed, a temporary guarantee on transaction deposits over the $250,000 federal insurance cap would be the latest step in a sweeping government response to an unfolding banking disaster.
Silicon Valley Bank’s failure on March 10 has rattled the banking system. The bank was ill-prepared to contend with the Federal Reserve’s interest rate increases: It held a lot of long-term bond that had declined in value as well as an outsize share of uninsured deposits, which tend to be withdrawn at the first sign of trouble.
Still, its demise focused attention on other weak spots in finance. Signature Bank has also failed and First Republic Bank has been imperiled by outflows of deposits and a plunging stock price. In Europe, the Swiss government had to engineer the takeover of Credit Suisse by its competitor UBS.
The U.S. government has responded to the turmoil with a volley of action. On March 12 it announced that it would guarantee the big depositors at Silicon Valley Bank and Signature. The Federal Reserve announced that it would set up an emergency lending program to make sure that banks had a workaround to avoid recognizing big losses if they — as Silicon Valley Bank found itself — needed to raise cash to cover withdrawals.
And on March 19, the Fed announced that it was making its regular operations to keep dollar financing flowing around the world more frequent, to try to prevent problems from extending to financial markets.
For now, the administration has stressed that it will use the tools it is already deploying to protect depositors and ensure a healthy regional and community banking system.
“We will use the tools we have to support community banks,” Michael Kikukawa, a White House spokesman, said Monday. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed.”
The midsize Bank Coalition of America has urged federal regulators to extend F.D.I.C. insurance to all deposits for the next two years, saying in a letter late last week that it would halt an “exodus” of deposits from smaller banks.
“It would be prudent to take further action,” Mr. Khanna said.
Yet not even all banking groups agree that such a step is necessary.
Lifting the deposit cap temporarily could send a signal that the problem is worse than it is, said Ann Belcar, senior executive vice president of the Independent Community Bankers of America, a trade group for small U.S. banks. She said that many of its member banks are seeing an increase in deposit.
“Right now, we’re in a phase of, let’s exercise restraint,” she said.
There is precedent for temporarily expanding deposit insurance. In March 2020, Congress’s first major coronavirus relief package authorized the Federal Deposit Insurance Corporation to temporarily lift the insurance cap on deposits.
And in 2008, as panic coursed across Wall Street at the outset of the global financial crisis, the F.D.I.C. created a program that allowed for unlimited deposit insurance for transaction accounts that chose to join the program in exchange for an added fee.
Peter Conti-Brown, a financial historian and a legal scholar at the University of Pennsylvania, said the 2010 Dodd Frank law ended the option for the agencies to temporarily insure larger transaction accounts the way they did in 2008.
Now, he said, the regulators would either need congressional approval, or lawmakers would have to pass legislation to enable such a broad-based backstop for deposits. While regulators were able to step in and promise to protect depositors at Silicon Valley Bank and Signature Bank, that is because the collapse at those banks was deemed to have the potential to cause broad problems across the financial system.
For smaller banks, for which failures would be much less likely to have systemwide implications, that means that uninsured depositors might not receive the same kind of protection in a pinch.
In a nod to those worries, Janet Yellen, the Treasury secretary, suggested on Tuesday that even smaller banks could warrant a “systemic” classification in some cases, allowing the agencies to backstop their deposits.
“The steps we took were not focused on aiding specific banks or classes of banks,” Ms. Yellen said in a speech. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
But the chances that such an approach — or another workaround that allows the government to take the action without passing legislation — would be effective are not yet clear.
Sheila Bair, who was chair of the F.D.I.C. from 2006 to 2011, said she thinks that the Biden administration should propose legislation that would let the F.D.I.C. reconstitute a bigger deposit insurance program and use a “fast-track” legislative process to put it in place.
While Dodd-Frank curbed the ability of the F.D.I.C. to restart the transaction account guarantee program on its own, it did provide for a streamlined process for future lawmakers to get it up and running again, she said.
“I hope the president asks for it; I think it would settle things down pretty quickly,” Ms. Bair said in an interview. “Deposit runs can pick up pretty fast and the F.D.I.C. needs to be able to react quickly.”
But some warned that enacting broad-based deposit insurance could set out a dangerous precedent: signaling to bank managers that they can take risks unchecked, and leading to calls for more regulation to protect taxpayers from potential costs.
Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said he would oppose even a revamp of the 2008 deposit insurance because he thinks that it would be temporary in name only: It would reassert to big depositors that the government will come to the rescue.
“If we think the market is going to believe that these things are temporary when they are constantly done in times of crisis,” he said, “then we’re deluding ourselves.”
Alan Rappeport contributed reporting.