The now-2-week-old banking crisis that has sunk Signature, Silvergate and Silicon Valley banks — and sent First Republic into a spiral — has helped regulators and lawmakers reprioritize.
Who would have predicted a month ago that the Federal Deposit Insurance Corp.’s $250,000 cap would generate so much chatter?
Treasury Secretary Janet Yellen’s comment in a March 16 Senate hearing that uninsured deposits would only be guaranteed for banks deemed a contagion threat sparked concern that the same considerations wouldn’t be given to customers of smaller banks.
“A lot of us were kind of offended at what had come out, that the Treasury was going to guarantee all of the deposits for the larger banks — the too-big-to-fails — and us smaller banks were going to be on our own," Daniel Kimbell, whole leads the wealth-management unit at St. Johnsbury, Vermont-based Passumpsic Bank, told Reuters this week.
Yellen clarified Wednesday that the same “systemic risk exception” the Treasury Department, FDIC and Federal Reserve gave to SVB and Signature depositors could be applied to smaller banks in “a case-by-case determination."
“The failure of a small bank, of a community bank, could likewise trigger a run on other banks," she said Wednesday. “The community banks in this country, we know, are strong and resilient. And I think banks need to reassure their customers that they are strong and resilient, and the government needs to do exactly the same thing.”
How government does that is a matter of debate.
Yellen told senators Wednesday she has “not considered or discussed anything having to do with blanket insurance or guarantees of deposits” without working with lawmakers.
A permanent lift of the $250,000 deposit insurance cap would require the approval of Congress. However, the Treasury Department can access the Exchange Stabilization Fund in a temporary pinch.
“All [Yellen] needs is approval from the president to tap into that basket,” Henrietta Treyz, director of economic policy research at Veda Partners, told The New York Times.
However, Sen. Bill Hagerty, R-TN, on Wednesday said that would be a “misuse” of the fund, according to Bloomberg.
Yellen did say it would be "worthwhile" for Congress to look at changes to deposit insurance, adding there could be “reasoned discussions” on lifting the limit. That could be permanent or temporary — Congress temporarily suspended the limit in 2020 at the start of the COVID-19 pandemic.
What are the odds?
But getting lawmakers to agree on such a measure may prove a herculean task.
“There’s no chance of a bill passing Congress,” Treyz told The New York Times.
Tell that to some leading Democrats.
“There seems to be more commonality about what to do with FDIC than there was four or five days ago,” Senate Banking Committee Chair Sherrod Brown, D-OH, told Bloomberg on Tuesday. “By our hearing next week, we may have some clarifying thoughts that there can be some consensus.”
The chair of the House Financial Services Committee, however, struck a far more measured tone.
“Too often, as legislators, we walk around and assume the answer is legislation," Rep. Patrick McHenry, R-NC, said Wednesday, according to Reuters. "We cannot legislate confidence.”
Changing the deposit insurance limit "could have serious consequences for the financial system," including moral hazard and more bank consolidation, McHenry told American Banker.
"We need to have a full understanding of what those trade-offs truly are," he said.
Elsewhere, the banking crisis has brought together an unlikely bipartisan pairing of senators, in an effort to establish a more independent inspector general at the Federal Reserve.
Sens. Rick Scott, R-FL, and Elizabeth Warren, D-MA, introduced a bill Wednesday to give the central bank an IG who is appointed by the president and confirmed by the Senate.
“After the Federal Reserve’s failure to properly identify and prevent the shocking failures of Silicon Valley Bank and Signature Bank, it’s clear we can’t wait any longer for big change at the Fed,” Scott said in a release Wednesday.
Warren’s inclusion here follows on her request last week that an IG investigation of the SVB and Signature failures be “free of influence from the bank executives or regulators” who may have been at fault.
“I am particularly concerned that you avoid any interference from Fed Chair Jerome Powell, who bears direct responsibility for — and has a long record of failure involving — regulatory and supervisory matters involving these two banks,” Warren wrote.
Warren has long been a detractor of Powell’s — and reiterated that Wednesday in her support of Scott’s bill.
“Last year, during the largest ethics scandal in the history of the Federal Reserve System, I led a bipartisan bill to bolster accountability at the Fed, and I appreciate Senator Scott's work to advance this effort,” Warren said Wednesday.
An issue in search of a delay
While deposit insurance and Fed reform have gained steam as short-term priorities, other measures appear to have fallen off the radar — at least for now.
“I want to do SAFE Banking,” Brown said of the long-running effort to improve banking protections for cannabis businesses, according to Bloomberg.
Brown is postponing hearings on the bill, so the Senate Banking Committee can focus on SVB- and Signature-related matters.
“It doesn’t mean long-term delay, but it means delays a couple weeks,” Brown said.
To observers, it may seem that SAFE Banking is just a measure in search of a delay. The bill has passed in the House seven times but has consistently met opposition in the Senate — and twice in December was excluded as an add-on to other measures — specifically, the National Defense Authorization Act and a $1.7 trillion omnibus.
“What this crisis means is probably the duration of the capital tightness in our space (will continue) because we're seeing risk-off mentality," Morgan Paxhia, co-founder of cannabis hedge fund Poseidon Investment Management, told Reuters. "We're expecting banks to become more restrictive with lending and that's going to have implications.”
Like it’s 2021
Surprisingly, though, one banking tool seeing lawmaker pushback as though it’s a callback to 2021 is the overdraft fee.
Sens. Cory Booker, D-NJ, and Raphael Warnock, D-GA, wrote the CEOs of JPMorgan Chase, Bank of America, Wells Fargo, PNC, U.S. Bank, Truist, TD, Regions, Huntington and Citizens Bank, asking them Tuesday to waive overdraft and nonsufficient funds fees in the wake of the failures of Silicon Valley Bank and Signature Bank.
“Disruptions across the banking industry this month … compound the difficult financial situation customers find themselves in,” Booker and Warnock wrote in the letters, seen by CNBC.
The senators separately wrote the leaders of the Fed, FDIC, Office of the Comptroller of the Currency and National Credit Union Administration, to place a brief moratorium on the fees, CNBC reported.