FDIC report to reopen U.S. bank deposit insurance debate

By Hannah Lang

(Reuters) – A key U.S. banking regulator is set to publish a comprehensive overview of the federal deposit insurance system on Monday, teeing up fresh debate about whether the government should expand protections on bank deposits – and if so, by how much.

The review will be the third report issued in the wake of the collapse of Silicon Valley Bank and Signature Bank (OTC:) in March, when regulators ended up backstopping all deposits – including those above the Federal Deposit Insurance Corp’s guarantees of up to $250,000 per person, per bank – in an attempt to prevent contagion to the banking system.

Now, the FDIC is planning to lay out policy options for changing the way deposits are guaranteed amidst calls from some lawmakers to raise the cap, or even ditch it altogether, in order to stem outflows from small and regional lenders that were large and lasting in the aftermath of the March bank failures and more recent troubles at First Republic Bank (NYSE:), which was seized by regulators on Monday and sold to JPMorgan Chase & Co. (NYSE:)

FDIC Chair Martin Gruenberg has said the report, to be released at 2:00 p.m. EDT (1800 GMT) on Monday, will address options on deposit insurance coverage levels, excess deposit insurance, implications of risk-based pricing and the adequacy of the regulator’s deposit insurance fund, which will take an estimated $20 billion hit from the failure of SVB and a smaller knock of about $2.5 billion from Signature Bank. The FDIC said Monday the failure of First Republic would cost the fund approximately $13 billion.

The FDIC’s deposit insurance fund helps to fulfill the agency’s guarantee of bank deposits up to $250,000 per person. In the event an insured bank fails, the FDIC uses the deposit insurance fund to pay back customers who maintained accounts under the limit.

That $250,000 limit was enshrined in law by the 2010 Dodd-Frank reform law passed following the 2008 financial crisis, upped from what was before a $100,000 cap.

But following the collapse of SVB and Signature, some have said that the limit might need rethinking.

U.S. Federal Reserve Chair Jerome Powell told Republican lawmakers in March that Congress should re-evaluate limits on the size of federally insured bank deposits.

Democratic Senator Elizabeth Warren told CBS’s “Face The Nation” in March that lifting the cap would be “a good move,” and Republican Senator Mike Rounds has questioned whether the $250,000 limit is still appropriate.

AN EXPLICIT GUARANTEE

Eliminating the cap altogether could be expensive, and costs would likely be passed on to banks’ customers. It could also end up undermining financial stability, critics warn, because banks might take greater risks if their deposit bases are considered more stable.

Those in favor of getting rid of the cap argue that the government’s full backstop of SVB and Signature deposits already signals an implicit guarantee of all bank deposits. Better to make it explicit, their argument goes, along with any restrictions on lending or increased capital requirements deemed necessary to rein in excess risk-taking.

Some analysts have floated a more targeted change: raising the insurance cap for small business accounts used to manage payroll and other transactions.

FDIC’s initial announcement of its March 10 takeover of SVB noted that accounts exceeding the insurance limit might not be made whole, prompting a scramble by local tech CEOs who banked at SVB to figure out how to make payroll, and touching off mass withdrawals at all but the biggest banks.

Generally speaking, accounts exceeding the $250,000 limit mostly belong to entities that need a lot of cash on hand to make payroll such as small businesses, nonprofits or municipal governments.

Still, any changes would need legislation from a deeply divided Congress. The Republican House Freedom Caucus said in a March statement that its members would oppose any universal federal guarantee on bank deposits above the current $250,000 limit.

The Fed on Friday issued a scathing assessment of its failure to identify problems and push for fixes at Silicon Valley Bank before the U.S. lender’s collapse, and promised tougher supervision and stricter rules for banks in the aftermath.

In a separate report, the FDIC said the failure of Signature Bank was caused by poor management and a pursuit of rapid growth, but that the regulator struggled with staffing shortages and could have escalated supervisory actions sooner.