Banks across the country are calling on the Federal Deposit Insurance Corporation FDIC to insure all bank deposits to prevent bank runs like those that have toppled Silicon Valley Bank and Signature Bank.
The FDIC usually leaves balances in excess of that being vulnerable in the event of a bank failure, up to a cap of $250,000 per depositor. In response to the collapse of Silicon Valley Bank and Signature Bank, federal regulators granted systemic risk exceptions and guaranteed all deposits at banks that would normally be uninsured.
The Treasury Department has signaled that regulators aren't planning to backstop uninsured deposits at banks that aren't granted systemic risk exceptions. The uncertainty created by bank failures along with federal regulators response has prompted some customers of mid-sized and community banks to withdraw funds from smaller banks and move them to larger, systemically important banks considered too big to fail a dynamic that could worsen if additional banks fail.
That has led to community banks urging regulators to take a more evenhanded approach to the issue by guaranteeing all uninsured deposits regardless of the banking institution for the next two years.
Anne Balcer, senior executive vice president and chief of government relations and public policy at the Independent Community Bankers of America ICBA, told FOX Business that regulators should take a prudent approach to changes in FDIC insurance. It may make sense for Congress to look at the insurance limit cap and revisit raising it based on metrics showing the increase in deposit balances since the previous increase, but the tone from Treasury of picking winners and losers doesn't fit the logic and is largely inappropriate, Balcer said. If the FDIC decides to provide unlimited deposit insurance for some institutions, even on a limited basis, they cannot discriminate and leave others out, especially those that have been operating on a safe and sound basis, such as the nation's community banks. The Mid-Size Bank Coalition of America MBCA sent a letter to the Treasury Department, the FDIC, and the Federal Reserve to urge regulators to lift the deposit insurance cap for all institutions for two years, according to a report by Bloomberg.
The MBCA letter said that it would stop the exodus from smaller banks, stabilize the banking sector and reduce the chances of more bank failures.
In congressional testimony last week, I stated that if a majority of the Fed board, and I in consultation with the president, uninsured deposits will only be backstopped by the government, the failure to protect uninsured depositors will cause systemic risk and economic and financial consequences. Sen. James Lankford, R-Okla., noted that smaller banks could be less attractive for depositors with funds above the $250,000 threshold.
He said it sounded as if Yellen was encouraging anyone who has a large deposit at a community bank to say, We are not going to make you whole, but if you go to one of our preferred banks, we will make you whole. That is certainly not something we encourage by saying. The bank failures will lead to a week of the next week. The House Financial Services Committee will hear from Martin Gruenberg, chairman of the FDIC's board of directors, and Michael Barr, the Federal Reserve Board of Governors vice chair for supervision, at a hearing on March 29.