The Federal Deposit Insurance Corporation (FDIC) is being urged by mid-sized regional banks and their community banking equivalents across the nation to guarantee all bank deposits in order to stop bank runs like the ones that brought down Silicon Valley Bank and Signature Bank.
Deposits above that amount are exposed in the event of a bank collapse because the FDIC only typically guarantees deposits up to a ceiling of $250,000 per depositor. Federal authorities responded to the recent failures of Silicon Valley Bank and Signature Bank by granting systemic risk exceptions and guaranteeing all deposits at those banks, even those that otherwise wouldn’t be protected.
The Treasury Department has indicated, however, that authorities do not intend to support uninsured deposits at banks that are not given systemic risk exemption. Some customers of mid-sized and community banks have transferred money from smaller banks to larger, systemically important banks that are viewed as “too big to fail” as a result of the uncertainty caused by the bank failures and the federal regulators’ response; this dynamic could get worse if more banks fail.
Due to this, mid-sized and community banks have urged regulators to handle the situation more impartially by guaranteeing all uninsured deposits for the next two years regardless of the banking institution.
Regulators should adopt a “strong selection to any modifications in FDIC insurance,” according to Anne Balcer, senior executive vice president and director of government relations and public policy at the Independent Community Bankers of America (ICBA), according to our correspondent.
In addition, Balcer said that the Treasury’s tone of “picking winners and losers” defies reason and is generally inappropriate. “It may make sense for Congress to look at the insurance limit cap and revisit raising it based on metrics demonstrating increasing deposit balances since the previous increase,” he continued. “If the FDIC chooses to offer unlimited deposit protection for some institutions, even on a limited basis, they cannot discriminate against and exclude others, especially those that have been conducting business in a safe and sound manner, such as the nation’s community banks.”
According to a Bloomberg story, the Mid-Size Bank Coalition of America (MBCA) requested that authorities remove the deposit insurance cap for all institutions for a period of two years in a letter to the Treasury Department, FDIC, Comptroller of the Currency, and the Federal Reserve.
The MBCA letter reportedly stated that doing so would immediately stop the outflow from smaller banks, stabilize the banking industry, and significantly lower the likelihood of additional bank failures.
In testimony to Congress last week, Treasury Secretary Janet Yellen stated that the government would only backstop uninsured deposits “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.”
Sen. James Lankford, R-Oklahoma, said it would deter depositors with assets exceeding the $250,000 cap from using smaller banks.
He claimed that Yellen appeared to be “encouraging anyone who has a substantial deposit at a community bank to say, “We’re not going to make you whole, but if you go to one of our chosen banks, we will make you whole.”
In response to the bank collapses, Congress will conduct a hearing next week. On March 29, Michael Barr, the vice chair for supervision of the Federal Reserve Board of Governors, and Martin Gruenberg, the chairman of the FDIC’s board of directors, will testify before the House Financial Services Committee. That’s definitely not something that we’re advocating, Yellen retorted.