US studies ways to insure all bank deposits if crisis grows

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 instruments it has already rolled out to address banking troubles.

Treasury Secretary Janet Yellen projected calm Tuesday but told a gathering of bankers that additional rescue arrangements “could be warranted” if any new failures at smaller institutions jeopardize financial stability.

Yellen, who made her remarks at the American Bankers Association, said that overall “the situation is stabilizing.”

“And the U.S. banking system remains sound,” Yellen said, drawing clear differences between recent events and the 2008 financial meltdown, which triggered trillions of dollars of financial losses globally.

“This is different from 2008,” she said. “2008 was a solvency crisis, rather what we’re seeing now is contagious bank runs.”

Many lawmakers have yet to solidify their positions, and some have openly opposed lifting the deposit 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.

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 Bank. 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 Sunday, 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.