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Lawmakers float ways to recapture deposit insurance discipline

Lawmakers endorse rescue but want a firm deposit insurance message

Senate Banking Chair Sherrod Brown, D-Ohio, raised the "magnitude of the uninsured deposits" at Silicon Valley Bank and Signature Bank after federal regulators said they would guarantee the deposits.
Senate Banking Chair Sherrod Brown, D-Ohio, raised the "magnitude of the uninsured deposits" at Silicon Valley Bank and Signature Bank after federal regulators said they would guarantee the deposits. (Tom Williams/CQ Roll Call file photo)

Financial regulators’ actions in taking over banks on opposite sides of the country unleashed widespread discussion, including on Capitol Hill, about the core part of the rescue: guaranteeing all the deposits, including those above the $250,000 cap set by federal insurance.

Lawmakers mostly endorsed the regulators’ moves to protect all deposits at Silicon Valley Bank in Santa Clara, Calif., and Signature Bank in New York, but they have also tentatively started to discuss ways to avoid sending a message that depositors above the federal cap don’t have to worry about their money.  

Interviews with lawmakers on both sides of the aisle found some worried that banks and depositors would conclude all deposits will be guaranteed by the federal government, removing a risk that should weigh in their decisions. Others feared customers at small and midsize banks would hear the opposite message and move their money to the two or three biggest banks considered “too big to fail.”

“There’s always a degree of moral hazard when the government steps into a crisis and prevents catastrophe,” said Sen. Richard Blumenthal, D-Conn. “There’s a balance that has to be struck.”

Lawmakers floated several ideas that may take hold as Washington deals with the fallout: private insurance on deposits above a certain threshold; bank fees set to reflect the amount of uninsured deposits; distinguishing between depositors that rely on the funds to meet running business costs and the depositors that are parking money in the bank; and, most commonly, raising the cap on deposit insurance.

The SVB collapse, in particular, has raised eyebrows because of the size of some deposits, including crypto company Circle’s $3.3 billion. 

Senate Banking Chairman Sherrod Brown, D-Ohio, referred to the “magnitude of the uninsured deposits” in a March 16 letter to the Treasury Department, Federal Reserve and Federal Deposit Insurance Corporation seeking a comprehensive review of the two banks’ rescues. More than 90 percent of SVB’s deposits were uninsured, according to S&P Global.

Sen. Jack Reed, D-R.I., broached the idea of a bank’s FDIC fee being based on the amount of uninsured deposits, adding that banks like SVB would have paid more insurance and contributed more to the deposit insurance fund. He also mulled insurance or reinsurance for companies managing multimillion-dollar payrolls.

Sen. Elizabeth Warren, D-Mass., said small businesses can’t check risky behaviors at the banks where they deposit money and so shouldn’t be on the hook in a failure. Warren, a member of the Banking, Housing and Urban Affairs Committee, also mentioned a possible exception.

“The one exception I might draw to that is the billion-dollar depositor,” she said. “That entity looks a whole lot more like an investor than a depositor. They’re not getting the standard business deal. And that should be treated differently.”

Sen. Mark Warner, D-Va., said at a press breakfast Monday that he is interested in exploring private insurance for deposits above $250,000.

Deposit insurance is designed to deter customers from withdrawing their money out of fear they won’t be able to get it later from a bank that’s in trouble. Enough withdrawals in short succession will put a bank in trouble, as was the case at SVB. But the FDIC cap of $250,000 is also meant to encourage customers with large amounts of money to be more careful about putting it in one bank. 

Bartlett Naylor, financial policy advocate for Public Citizen, said he’s torn on raising the cap, adding that the organization was also determining a stance on the policy.

“The basic problem with banking is the moral hazard of deposit insurance,” he said in an interview. “I thought deposit insurance was this unhappy little bet that bankers wouldn’t get totally crazy and help a relatively little guy that shouldn’t have to perform due diligence when he opens a checking account.” 

Raising the cap to cover businesses that keep millions in the bank could change that dynamic, he said. “At some point, there’s a business that I think ought to be able to stand on its own.” 

Isolating the SVB, Signature rescues

Regulators took pains to send a message that banks and customers shouldn’t assume the federal government will cover more than $250,000 in deposits in the future.

“We felt that there was a serious risk of contagion that could have brought down and triggered runs on many banks,” Treasury Secretary Janet L. Yellen told the Senate Finance Committee last week. “A bank only gets that treatment if a majority of the FDIC board, a supermajority of the Fed board and I, in consultation with the president, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences.” 

But congressional critics and supporters of the federal response worry that the message is that the federal government will cover all deposits.

“The Biden administration had a knee-jerk reaction to agreeing to pay above the $250,000,” said Rep. Ralph Norman, R-S.C., a member of the House Financial Services Committee. “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.”

Less than two weeks after the SVB rescue, Norman is one of the few members openly faulting the regulators for the treatment of deposits. Most others were reserving judgment or even endorsing the rescues.

“One of the questions is going to be, did the Federal Reserve Bank make the best of the bad choices that were available to them,” said House Financial Services member Bryan Steil, R-Wis. “There was no good choice for the Federal Reserve to make. Did they make the best of the bad options they had in front of them?”

Reed said it’s important to send the message that future bank failures may not be handled the same way. 

“We have to reflect on what steps we can take to send the message, again, that there’s a limit on deposit insurance,” Reed said in an interview. “The presumption should be that there is a limit, and we should reinforce that fact and also have the banking industry reinforce it to their customers.”

Others have called for a review of the FDIC $250,000 limit on deposits, particularly for small businesses that deposit cash to cover day-to-day operations. Congress last raised the cap from $100,000 to $250,000 after the 2008 financial crisis.

Sen. Mitt Romney, R-Utah, was among those who said Congress should revisit the cap. If bank customers, particularly small businesses, fear deposits aren’t safe in small community or midsize regional banks, they’ll move their money to a handful of big banks, he said.

“If we allow that worry to persist, companies will all move their money to two or three banks in New York, and we’ll have in effect national banks like most countries, without regional banks,” Romney said in an interview. “And regional banks are really the places that small businesses go for lending.”

House Financial Services Chairman Patrick T. McHenry, R-N.C., said Sunday on CBS’s “Face the Nation” that he would look into whether the cap should be raised, but he didn’t commit either way. 

Fed Vice Chair for Supervision Michael S. Barr is reviewing regulators’ actions in the cases of SVB and Signature, including the supervision and regulation of the banks before their rescue. His report is due by May. 

“There should be nothing off the table, but I think we have to get the diagnosis before we prescribe the cure,” Reed said.

Sen. Tim Kaine, D-Va., hinted that Barr’s report should contain proposed solutions. “I think that assessment is going to be key to us getting the right mix of solutions and some of them may be legislative, some of them may be administrative.”

Clawbacks

Even as lawmakers considered the implications of the deposit guarantee, some are looking at legislation that could punish the executives responsible for failed banks.

President Joe Biden called on Congress to pass legislation to ensure executives at failed banks are held accountable, including through fines, compensation clawbacks and professional bans.

SVB CEO Greg Becker is reported to have sold $3.6 million in company stock before the failure, and bank employees received bonuses hours before the FDIC took over the bank. Blumenthal introduced a bill, as did California Democrats Adam B. Schiff and Mike Levin in the House, that would claw back bonuses and stock sale profits from executives and add the proceeds to the FDIC Deposit Insurance Fund.

“This measure answers the common call for accountability to meet sheer corporate greed — Silicon Valley Bank top executives pocketing huge bonuses even as their business was collapsing and depositors’ money disappearing into thin air,” Blumenthal said in a statement. “Our legislation claws back self-dealing payouts and stock transaction benefits to top bank leaders, returning the money to taxpayers and protecting depositors.”

David Lerman and Mary Ellen McIntire contributed to this report.   

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