The Biden administration is under increasing pressure to seek an extension of the federal bank deposit guarantee to bolster confidence in the financial system and stave off further trouble among U.S. regional banks.
The Federal Deposit Insurance Corporation, which is backed by banks, guarantees deposits up to $250,000. But a growing chorus of influential bipartisan lawmakers and banking industry lobbyists have pushed for that limit to be raised or suspended in recent days.
“I think lifting the . . . the cap is a good move,” Elizabeth Warren, the Democratic Senator from Massachusetts, told CBS on Sunday. “Is it $2m? Is it $5m? Is it 10m? Small businesses need to be able to rely on their money to do payroll, to pay utility bills. nonprofits need to be able to do that,” she added.
The Biden administration is forced to consider additional measures to protect banks after the measures it took last week – including guaranteeing all deposits at Silicon Valley Bank and Signature Bank, and an injection deposit led by Wall Street in the First Republic Bank – failed to reassure investors on Friday.
Biden administration officials have not ruled out the possibility of calling for an expansion of the limit on FDIC-insured deposits, which would require congressional approval, nor have they taken a position on this subject. The White House and Treasury declined to comment on Sunday.
Any decision to extend FDIC deposit insurance would have to be weighed carefully against concerns that it could encourage risky behavior by banks, as well as the cost to banks and consumers, as it would likely come with higher fees. Rather than a short-term fix, it could be part of the longer-term reforms being debated after this week’s unrest.
“All options have to be on the table, and that’s how I approach it. But if we do that, we have to understand their trade-offs. It’s not just about allowing a broader set of insurance coverage. This is costing the financial system, and in particular the community banks, considerably. We have to look at this very carefully,” Patrick McHenry, Republican chairman of the House Financial Services Committee, told CBS.
A spokesman for Sherrod Brown, the Democratic chairman of the Senate Banking Committee, told the FT: ‘Senator Brown believes working Americans and their families should not pay the price for the risky bets of other people who don’t pay not – whether on Wall Street or in Silicon Valley Any changes to deposit insurance must protect small businesses and workers, not big investors.
The drive to expand FDIC insurance reflects the fragmented landscape of the US banking industry, with nearly 4,000 lenders reportedly overseen by the Federal Reserve.
While nearly half of the sector’s $31.4 billion in assets are concentrated in so-called global systemically important banks like JPMorgan Chase and Bank of America, trillions of dollars are in thousands of smaller lenders.
Some 99 so-called regional banks with between $10 billion and $100 billion in assets have $2.7 billion in assets, while about 3,500 “community banks” each with less than $10 billion in Assets collectively have $2.8 billion in assets, according to CFRA, a data report and research service.
A coalition of midsize US banks has already sent a letter to regulators asking them to extend insurance to all deposits for two years. “This will immediately halt the outflow of deposits from smaller banks, stabilize the banking sector and significantly reduce the risk of further bank failures,” the group wrote, according to Bloomberg News.
Janet Yellen, the U.S. Treasury Secretary, has come under fire after telling Congress last week that uninsured deposits could only be guaranteed if U.S. officials and regulators determined — at the level of each individual bank — whether there was a systemic risk for the financial system, as was done with SVB and Signature.
Jefferies analysts said this week that Fed loans to banks in need of short-term cash, along with other Treasury and FDIC actions, should help ensure that further deposit withdrawals do not occur. would not lead to further bank failures. However, Jefferies analysts argued that current events portend a potential credit crunch for small businesses in the near future.
“Regional banks that have [fuelled] the small business boom that has continued since the pandemic will be much more constrained in their ability and willingness to lend, regardless of the stability of their deposits or access to cash from the Fed,” Jefferies wrote.
Additional reporting by Colby Smith in Washington
