Congress ponders covering big deposits

Bipartisan move seeks to raise FDIC’S $250,000 cap to prevent runs on banks

WASHINGTON — Lawmakers are looking for ways to resolve a major concern that threatens to keep the banking industry in turmoil: the fact that the federal government insures bank deposits of no more than $250,000.

Some members of Congress are looking for ways to raise that limit, at least temporarily, in order to stop depositors from pulling their money out of smaller institutions that have been at the center of recent bank runs.

Rep. Ro Khanna, D-calif., and other lawmakers are in talks about introducing bipartisan legislation as early as this week that would temporarily increase the deposit cap on transaction accounts, which are used for activities like payroll, with an eye on smaller banks. Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.

Others, including Sen. Elizabeth Warren, D-mass., have suggested lifting the deposit cap altogether.

Any broad expansion to deposit insurance could require action from Congress because of legal changes made after the 2008 financial crisis, unless government agencies can find a workaround. The White House has not taken a public position, instead emphasizing the tools it has already rolled out to address banking troubles.

Many lawmakers have yet to solidify their positions, and some have openly opposed lifting the cap, so it is not clear that legislation adjusting it even temporarily would pass. While such a move could calm nervous depositors, it could have drawbacks, including removing a big disincentive for banks to take on too much risk.

Still, Senate staff members from both parties have been in early conversations about whether it would make sense to resurrect some version of the previous guarantees for uninsured deposits, according to a person familiar with the talks.

Even after two weeks of aggressive government action to shore up the banking system, jitters remain about its safety after high-profile bank failures. Some worry that depositors whose accounts exceed the $250,000 limit may pull their

money from smaller banks that seem more likely to crash without a government rescue. That could drive people toward bigger banks that are perceived as more likely to have a government guarantee — spurring more industry concentration.

Silicon Valley Bank’s failure March 10 has rattled the banking system. The bank was illprepared to contend with the Federal Reserve’s interest rate increases; it held a lot of longterm bonds that had declined in value as well as an outsize share of uninsured deposits, which tend to be withdrawn at the first sign of trouble.

Still, its demise focused attention on other weak spots in finance. Signature Bank has also failed, and First Republic Bank has been imperiled by outflows of deposits and a plunging stock

price. In Europe, the Swiss government had to engineer the takeover of Credit Suisse by its competitor UBS.

The U.S. government has responded to the turmoil with a volley of action. On March 12, it announced that it would guarantee the big depositors at Silicon Valley Bank and Signature.

The Federal Reserve announced that it would set up an emergency lending program to make sure that banks had a workaround to avoid recognizing big losses if they — as Silicon Valley Bank found itself — needed to raise cash to cover withdrawals.

And on March 19, the Fed announced that it was making its regular operations to keep dollar financing flowing around the world more frequent to try to prevent problems from extending to financial markets.

The midsize Bank Coalition of America has urged federal regulators to extend Federal Deposit

Insurance Corp. insurance to all deposits for the next two years, saying in a letter late last week that it would halt an “exodus” of deposits from smaller banks.

“It would be prudent to take further action,” Khanna said.

Yet not even all banking groups agree that such a step is necessary.

Lifting the deposit cap temporarily could send a signal that the problem is worse than it is, said Ann Belcar, senior executive vice president of the Independent Community Bankers of America, a trade group for small U.S. banks. She said that many of its member banks are seeing an increase in deposits.

“Right now, we’re in a phase of, let’s exercise restraint,” she said.

There is precedent for temporarily expanding deposit insurance. In March 2020, Congress’ first major coronavirus relief package authorized the FDIC to

temporarily lift the insurance cap on deposits.

And in 2008, as panic coursed across Wall Street at the outset of the global financial crisis, the FDIC created a program that allowed for unlimited deposit insurance for transaction accounts that chose to join the program in exchange for an added fee.

Peter Conti-brown, a financial historian and a legal scholar at the University of Pennsylvania, said the 2010 Dodd Frank law ended the option for the agencies to temporarily insure larger transaction accounts the way they did in 2008.

Now, he said, the regulators would either need congressional approval, or lawmakers would have to pass legislation to enable such a broad-based backstop for deposits. While regulators were able to step in and promise to protect depositors at Silicon Valley Bank and Signature Bank, that is because the

collapse at those banks was deemed to have the potential to cause broad problems across the financial system.

But some warned that enacting broad-based deposit insurance could set out a dangerous precedent: signaling to bank managers that they can take risks unchecked and leading to calls for more regulation to protect taxpayers from potential costs.

Aaron Klein, a senior fellow in economic studies at the Brookings Institution, said he would oppose even a revamp of the 2008 deposit insurance because he thinks that it would be temporary in name only; it would reassert to big depositors that the government will come to the rescue.

“If we think the market is going to believe that these things are temporary when they are constantly done in times of crisis,” he said, “then we’re deluding ourselves.”