It’s not often that liberals such as Sen. Elizabeth Warren (D-MA) and financial executives, or Republicans, agree on banking reforms.
But the latest major crisis in the financial sector is bringing some unlikely allies together, at least on one proposal, as Congress considers the path forward after two historic bank failures in recent weeks.
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Massive bank runs fueled the collapse of Silicon Valley Bank and New York-based Signature Bank in a matter of days earlier this month, prompting federal authorities to take over and spreading panic throughout the financial system.
In an effort to contain the fallout, the U.S. government announced that it was “taking decisive actions to protect the U.S. economy by strengthening public confidence in [the] banking system” and would protect all deposits, regardless of the amount, at both banks. Typically, the Federal Deposit Insurance Corporation only protects customer deposits up to $250,000.
“This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth,” the Treasury Department, FDIC, and Federal Reserve said in a joint statement.
Now, lawmakers from both parties are floating proposals to help stop the bleeding — and prevent future disastrous bank runs. One of those proposals is lifting the limit on bank deposit insurance to give clients greater confidence in the safety of their assets.
“I think that lifting the FDIC insurance cap is a good move,” Warren told CBS News’s Face the Nation on March 19. “Now the question is where’s the right number on lifting it? But recognize that we have to do this because these banks are underregulated, and if we lift the cap, we are requiring — or relying even more heavily on the regulators to do their jobs.”
That same day, one of Warren’s GOP colleagues on the Senate Banking Committee also suggested raising the limit. “When we talk about allowing a bank to fail, if — it’s one thing to say, ‘It’s OK to allow the owners of a bank to lose their resources,’” Sen. Mike Rounds (R-SD) told NBC’s Meet the Press. “It’s another thing to say that ‘the depositors should necessarily be allowed to lose their deposits.’”
“That’s the reason why we begin with a quarter of a million dollars in protection,” Rounds continued. “Perhaps that’s not enough. You know, we started at $200,000 a few years ago. We bumped it to $250,000 per deposit. Then the question is whether or not that’s still appropriate as things rise, as we have inflation, and so forth. Should we bump that up?”
The proposal comes amid growing concern that the broader U.S. economy is teetering on a crash reminiscent of the Great Recession. Silicon Valley Bank and Signature Bank are now the second and third-largest bank failures in U.S. history. The biggest, Washington Mutual, happened in 2008.
“It’s an extremely dangerous moment because there’s now significant stress in some parts of the U.S. banking system at a time when inflation is still too high,” Nouriel Roubini, an economist who predicted the 2008 crisis, told Bloomberg TV.
The collapse of Silicon Valley Bank, which served a large number of startups, and the subsequent fall of Signature Bank, a major New York real estate lender that had, in recent years, embraced clients in the world of cryptocurrency, sent shock waves throughout the financial system this month. Depositors feared their money at other regional banks might not also be safe, prompting more withdrawals and putting other institutions, such as First Republic Bank, at risk of failure.
Federal officials and U.S. bankers have rushed to try to allay those fears and prevent a possible domino effect among other regional banks. In addition to protecting deposits at the failed banks, the U.S. government “will make available additional funding to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors,” federal regulators said.
“This action will bolster the capacity of the banking system to safeguard deposits and ensure the ongoing provision of money and credit to the economy,” the Fed said in a statement. “The additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral.”
“The Federal Reserve is prepared to address any liquidity pressures that may arise,” the statement said.
Wall Street has stepped in as well. On March 16, nearly a dozen major banks, including Goldman Sachs, Bank of America, and Wells Fargo, announced they would make a total of $30 billion in uninsured deposits at First Republic to deploy their “financial strength and liquidity into the larger system, where it is needed the most.”
“Following the receiverships of Silicon Valley Bank and Signature Bank, there were outflows of uninsured deposits at a small number of banks,” the 11 banks said in a joint statement. “The banking system has strong credit, plenty of liquidity, strong capital and strong profitability. Recent events did nothing to change this.”
“The actions of America’s largest banks reflect their confidence in the country’s banking system,” the statement added. “Smaller- and medium-sized banks support their local customers and businesses, create millions of jobs and help uplift communities. America’s larger banks stand united with all banks to support our economy and all of those around us.”
Some financial executives have also expressed support for lifting the FDIC cap beyond $250,000. The Mid-Size Bank Coalition of America recently sent the independent government agency a letter asking it to insure all deposits for two years, Bloomberg reported. “Doing so will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce chances of more bank failures,” the letter said.
Meanwhile, American billionaire and hedge fund manager Nelson Peltz said the Fed should collect insurance premiums from bank customers for deposits over $250,000 to protect all of them, regardless of amount.
“I would put together a plan that applies only to U.S. banks in that the Fed gets an insurance premium for any money you leave in a U.S.-accredited bank over $250,000,” Peltz told CNBC, noting that he has spoken with elected officials about the idea. “So you’re creating income for the Fed, and in exchange for that, they insure the overage.”
In Washington, other lawmakers have echoed comments from Rounds and Warren on raising the limit. Congress last raised the cap in 2008 as a temporary measure and then made the change permanent in the Dodd-Frank Act two years later.
“When you have something like Silicon Valley Bank with over 90% of its depositors uninsured, do we increase the amount of premiums that banks will pay in order to have a bigger insurance fund, or do we just remain the way that we are and take it on a one-by-one basis for consideration?” California Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, told the New York Times.
The plan is not without its own risks. On NBC, Rounds addressed concerns that lifting the cap might encourage bankers to make riskier bets.
“You have to remember that because of Dodd-Frank to begin with, we’ve identified that there are a group of banks, the very largest, that we’ve identified as being too big to fail,” Rounds said. “And they are significant to the entire financial services of the United States, and therefore it is suggested very strongly that we won’t let them fail. Now the question is does that mean that they should have a competitive advantage over small- and medium-size banks when it comes to trying to lure depositors in?”
“We want to make sure that the tools are available for those smaller banks to be able to spread the risk and so that if a depositor comes in, and a lot of businesses will have more than a quarter of a million dollars in their accounts, when they do, should they be able to be assured that there are commercial products available that the banks are availing themselves to so that they can actually spread that risk out and those depositors then know that they’re safe in the smaller regional banks,” Rounds said.
Several Democratic lawmakers, including Warren, want to repeal the 2018 law signed by then-President Donald Trump to loosen the stricter Dodd-Frank banking rules enacted in the fallout of the Great Recession, citing the rollback as a key reason for the current crisis. But it’s unlikely Congress, in which Republicans control the House and Democrats narrowly control the Senate, will pass the legislation any time soon.
But because of its bipartisan backing thus far, raising the FDIC limit may stand a better chance. Asked if she is talking to the White House about raising the cap, Warren said: “I don’t want to talk about private conversations, but I will say it is one of the options that’s got to be on the table right now.”
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In any case, Treasury Secretary Janet Yellen has signaled that the U.S. government would step in to protect deposits at other banks should they fail.
“Our intervention was necessary to protect the broader U.S. banking system,” she said in a speech to the American Bankers Association, according to her prepared remarks. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”
