WASHINGTON – A credit union CEO who testified before a Senate Banking, Housing, and Urban Affairs Committee hearing, “Evaluating Perspectives on Deposit Insurance Reform,” warned that implicit protections for the largest banks create “dangerous ripple effects” — driving deposits away from local financial institutions, starving small businesses of credit, and hurting the defense industry’s supply chain.
A bank CEO who was also part of the panel used a question posed during the Q&A to criticize credit union acquisitions of banks.
The testimony comes as proposals have been put forth on Capitol Hill to raise deposit insurance coverage to $20 million for some commercial accounts.
Meanwhile, in his opening stattement, Committee Chairman Sen. Tim Scott (R-SC) said, “Reform is not simple. It comes with trade-offs. Expanding deposit insurance, for example, may provide more security for some small businesses, but if it’s not calibrated properly, it comes at a cost to banks, small businesses, and everyday Americans.”
But Rice said there are other risks in his comments.
“When their payroll is at risk, America’s stability is at risk. When their local banks are weakened, Main Street is weakened. And when small businesses stumble due to corporate greed, our national security stumbles, too,” Peter Rice, CEO of Hanscom FCU, told the Senate.
During his testimony Rice pointed to the collapse of Silicon Valley Bank, which lost “a quarter of its deposits in a single day,” with Signature Bank and First Republic following soon thereafter.
Outflows & Inflows
“Depositors moved roughly $119 billion out of small banks in one week — double the previous record — while the largest institutions saw inflows,” Rice said. “Per JPMorgan’s analysis $550 billion moved to big banks and money funds during the crisis. This wasn’t about better interest rates. It was about confidence. Americans believed the biggest banks were safer.”
Rice told the committee that multiple studies show Americans fled smaller institutions even when big banks offered no better returns, eroding confidence.
Effect on Small Businesses
In addition, Rice testified that two-thirds of small businesses depend on local and regional lenders.
“When confidence drives them to move deposits to Wall Street, communities lose credit, payrolls become unstable, and our defense supply chains grow brittle. We’ve already seen the cost.”
He cited a number of examples of bank failures and the cost to communities.
“So far the only message we have sent to Main Street has been clear: if you’re big, you’re safe; if you’re local, you’re at risk,” Rice said.
Rice, whose credit union was chartered to serve Hanscom Air Force Base in Massachusetts, said deposit insurance issues also pose risks to national security, with the Department of Defense depending on small businesses for critical parts, innovation, and supply chain resilience, reflected in more than $80 billion annually through direct defense contracts and $59 billion through subcontracting agreements.
Six Reforms Offered
Rice outlined six targeted reforms for Congress to protect communities, payrolls, and supply chains “without encouraging reckless risk-taking,” including:
• Targeted coverage for business payment accounts. Protect payroll, payables, and tax deposits — without blanket coverage for all accounts.
• Price risk properly. Require higher insurance premiums from banks with heavy concentrations of uninsured deposits.
• Strengthen mid-size bank transparency. Mandate faster reporting and stress testing for $50–250 billion institutions.
• Standardize reciprocal deposit protections. Safely spread balances across multiple banks for small businesses.
• Clarify the systemic risk exception. Establish clear criteria to reduce uncertainty and favoritism.
• Protect defense supply chains. Direct DoD to provide emergency financing when bank failures jeopardize payroll or contracts.
The Challenge
“The challenge is balancing stability with avoiding moral hazard. Blanket guarantees calm panic but encourage reckless behavior,” Rice stated. “The crisis taught depositors a simple lesson: size equals safety. That perception drained community and regional institutions, leaving small businesses — and even our defense base — exposed. Let us not ask what small businesses can do to survive our financial system — let us ask what our financial system must do to ensure small businesses, and the nation they sustain, will endure.”
Banker Questions CU Purchases of Banks
During the Q&A, Sen. Raphael Warnock (D-GA) asked Kenneth Kelly, who is chair of First Independence Ban in Detroit, about his thoughts on how proposed reforms would affect smaller community banks.
Kelly responded by talking about credit unions, acknowledging it wasn’t the question asked, and repeated an oft-used line by bankers that if something looks, acts and can buy a bank, it should be taxed like a bank. Addressing taxation, he suggestedm, would allow more smaller institutions to remain in communities.
