WASHINGTON–Members of Congress and four representatives from the banking industry discussed and debated the merits of a proposal to raise the FDIC deposit insurance cap to $10 million for certain business accounts.
As the CU Daily reported here, the House Committee on Financial Services held a hearing to examine the current deposit insurance framework in the United States, with hearing participants discussing the potential costs and benefits of proposed reforms.
The credit union trade groups have supported the increase in deposit coverage, provided the NCUSIF is given parity.
At the heart of the hearing was the Main Street Depositor Protection Act, have been put forth that seek to phase in the higher cap over 10 years. As the CU Daily reported earlier, one initial version of the proposal sought to set the deposit insurance cap at $20 million per account.
According to an account provided by the House committee, numerous issues were discussed, including:
Classifying Transaction Accounts
“One challenge in evaluating proposals in taking the approach of raising coverage limits for certain accounts is the potential cost to the banks and the deposit insurance fund are uncertain, as well as the amount of deposits that would be covered and how depositors and banks might respond to those higher limits, especially since deposits would shift to accounts with higher insurance limits,” said Chairman French Hill (R-AR). “Another issue is that the FDIC call report lumps together individuals, business partnerships, and corporations when banks report transaction and non-transaction accounts and then further lump all of those together for reporting of insured versus uninsured deposits. So, there’s ambiguity between interest bearing and non-interest bearing account classifications.”
On the Data Needed for Major Framework Changes
During his questioning, Digital Assets, Financial Technology, and Artificial Intelligence Subcommittee Chair Bryan Steil (R-WI) asked, “Do you think the current data the FDIC has is sufficient to enact any of the proposals that we’re talking about?”
Responded Chris Furlow, president and CEO of the Texas Bankers Association, , “I think we’ve got more work to do. … We need more data.”
Added Jill Castilla, president and CEO of Citizens Bank of Edmond: “Investment technology would be over $100,000, most likely annually, to be able to upgrade our technology, to be able to compute this type of data and man hours, I have 70 people. I probably would have to add a half a person, or another person, to be able to handle the data analytics.”
Committee Member Comments
Two committee members also commented:
- “Only with accurate information can we form a clear picture of the realities of today’s financial landscape. As technology continues to evolve, we must use it to improve our understanding as Congress examines the programs administered by the FDIC,” stated Rep. William Timmons (R-SC).
- “We know that more than 99% of deposits are already insured under the current limit, yet we lack in-depth data on how many businesses or personal accounts would be affected by increasing that limit,” said Rep. Roger Williams (R-TX).
On Whether Increasing Deposit Insurance Raises Costs for Banks
“It seems to be based on a provision in the bill that deals with how the FDIC calculates the deposit insurance fund’s reserve ratio,” declared National Security, Illicit Finance, and International Financial Institutions Subcommittee Chair Warren Davidson (R-OH). “It directs the agency to not count the full amount of newly insured deposits, and instead spreads costs out over ten years, which appears to be an accounting sleight of hand to prevent the reserve ratio from going below its statutory minimum.”
“… It’s a buy now, pay later concept, so it also squeezes in that deposit insurance fund number very close to that [statutory minimum], well you’re using money that we already paid in to be able to subsidize the cost of that, and you’re also not fully realizing, through this manipulation of funny math, to be able to say this is truly the liabilities that were exposed,” added Castilla. “They’re booking all of that insurance in real time but then paying for it for 10 years… if there is a failure during that time frame, the [deposit insurance fund] will not be able to handle that type of loss, and [small banks] will be exposed for a special assessment, as well as other community banks.”
What Congress Should Do
Castilla said, “Congress should focus on improving the system, not inflating it. At the same time, the regulatory burden on community banks continues to rise, often without regard to scale or business model. That burden limits our ability to serve the very communities that rely on us most. What community banks need is clarity, proportionality, and rules that reflect how we actually operate, manage and mitigate risk to our depositors, our communities, and the Deposit Insurance Fund.”
Grover Norquist, founder and president, Americans for Tax Reform said, “The proposal to raise deposit insurance coverage will not deter future bank failures but increase their costs when they occur and leave taxpayers footing the bill. Given the government’s poor track record in attempting to insulate the financial sector from all types of risk, more intervention in the banking sector is unwarranted. Deposit insurance was created to protect consumers and maintain confidence in the banking system, not to absolve corporations and wealthy individuals from the consequences of their risk-taking.
‘Deceptive’ Statement
“The FDIC claims that no depositor has ever lost money at an insured institution. This statement deceptively overlooks the fact that while most depositors are made whole, bank failures disrupt normal business activity and customers lose access to services,” Norquist continued. “That is why it is especially important to prevent bank failures rather than treating deposit insurance as a cure-all. Increases in federal guarantees shift risks from those who should bear the burden to the public. This breeds moral hazard, the tendency of actors to take greater risks when they know losses will be socialized. Rather than curtailing systemic risk, expanding deposit insurance would fuel it.”
