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Perspectives on Deposit Insurance Reform after Recent Bank Failures

Senate Committee on Banking, Housing, and Urban Affairs

Perspectives on Deposit Insurance Reform after Recent Bank Failures

Thursday, July 20, 2023

Topline

  • Democrats expressed concerns regarding smaller banks being burdened by changes.
  • Republicans asked panelists about what pros and cons came with increased coverage and perspectives on the FDIC.

 

Witnesses

  • Emily DiVito, Senior Program Manager for Corporate Power, The Roosevelt Institute
  • Thomas J. Fraser, Chief Executive Officer, First Mutual Holding Company
  • Andrew Olmem, Partner, Mayer Brown

Opening Statements

Chairman Sherrod Brown (D-Ohio)

In his opening statement, Brown said the recent failures of big banks demonstrate the importance of guardrails. He clarified that Congress needs to ensure banking safeguards work for everyone, not just Wall Street. Brown noted that while deposits serve a critical role in the US banking system, only 14% of deposits are held by community banks, which harms local communities. He concluded that Congress needs to ensure working families’ and small businesses’ investments are safe.

 

Ranking Member Tim Scott (R-S.C.)

In his opening statement, Scott noted that the US government took extraordinary measures to cover uninsured deposits. He said consumer trust and confidence demand a high price and said that Congress must take broader societal changes into account when considering changes. He closed by restating that people can now move their deposits very quickly and Congress must consider if a system set up in the 1930’s can handle this.

 

Testimony

Ms. Emily DiVito, Senior Program Manager for Corporate Power, The Roosevelt Institute

In her testimony, DeVito explained that deposit insurance offers eligible bank customers peace of mind and that the promise of government guarantees usually keeps banks stable. She recommended that Congress refrain from changing the current system, as any changes could lead to instability. DeVito also recommended universal, unlimited deposit insurance.

 

Mr. Thomas J. Fraser, Chief Executive Officer, First Mutual Holding Company

In his testimony, Fraser explained that mutual banks are subject to the same oversight as regular banks.  Fraser also noted that a structural shift in banking is occurring leading to new risks, which contributed to the recent failures. He urged Congress to focus on impacts to consumer protection and the stability of our banking system. He concluded that no regulatory scheme or deposit insurance reform can protect against irresponsible spending and bank management.

 

Mr. Andrew Olmem, Partner, Mayer Brown

In his testimony, Olmem said deposit insurance is a key pillar of the US financial system, and emphasized that any reforms must uphold the deposit insurance program’s statutory mission and avoid creating moral hazard that reduces incentive for risk management. Olmem noted that each increase in the deposit insurance limit increases the amount of support the FDIC can provide. He closed by saying the deposit insurance program needs to keep pace with technological changes.

 

Question & Answer

Smaller/Community Banks and Consumers

Brown asked why deposit insurance is important to small businesses and consumers. Fraser said it’s part of the backbone of the banking contract and that it requires banks to act in a responsible manner.

Sen. Tina Smith (D-Minn.) asked why it’s important to ensure smaller banks are not burdened by a special assessment. Fraser said he’s worried about the next bank collapse if the US doesn’t have any reform to the special assessments.

Smith asked if there is room to restructure assessment rates and methods so small banks don’t pay more than their fair share. DiVito and Fraser agreed.

Menendez asked about the impact some of these proposals would have on smaller banks. Fraser said the cost of complying with a new regime would require consideration, and that business owners can make better choices about where to place their large deposits.

 

Depositors

Sen. Elizabeth Warren (D-Mass.) asked if business and non-profit depositors would be less likely to flee the smaller banks if Congress provided more reassurance that their money will be protected by raising the insurance cap in smaller banks. DiVito said yes.

Warren asked if depositors would need to worry about whether they will be able to access their money in a community bank during a crisis impacting the banking system. DiVito said depositors are usually made whole through resolution or once their banks assets are sold.

Sen. Kirsten Sinema (I-AZ) asked panelists if they believe depositor discipline exists. Fraser said it depends on the customer and depositors. Olmem and DiVito agreed that it exists.

 

FDIC

Scott asked what Olmem’s thoughts were on the FDIC. Olmem said he thinks deposit insurance works very well for most Americans.

Sen. Bob Menendez (D-N.J.) asked if the FDIC would need extra flexibility to ensure a targeted coverage increase is properly tailored. DiVito said Congress needs to get the definition right to make sure the terms are distinguishable for the FDIC to enforce.

 

For more information on this meeting, please click here.

For an archive of past SIFMA hearing coverage, please click here.