Yellen says blanket financial institution deposit insurance coverage isn’t being mentioned
The US Treasury Secretary testifies before the Senate Appropriations Subcommittee on Financial Services March 22, 2023 in Washington, DC.
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WASHINGTON — Federal bank regulators are not considering plans to insure all U.S. bank deposits without congressional approval, Treasury Secretary Janet Yellen told members of a Senate Appropriations subcommittee on Wednesday.
Several banking groups and consumer advocates have called for some sort of universal deposit insurance after the government refunded most uninsured deposits at two banks that collapsed earlier this month, California’s Silicon Valley Bank and New York’s Signature Bank.
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When asked directly whether the Treasury Department would bypass Congress to insure all deposits, Yellen replied, “I have not considered or discussed anything to do with blanket insurance or guarantees on all deposits.”
Yellen was speaking to senators during a hearing on Capitol Hill to review the Treasury Department’s 2024 budget proposal.
The statement caused the stock market to fall and regional bank stocks to fall.
Congress has sweeping authority over the FDIC insurance limit, currently set at $250,000 under the Dodd-Frank financial reforms. Congress can also temporarily suspend the limit, as it did in 2020 as part of the government’s response to Covid-19.
This time, only a handful of Democrats have openly suggested that Congress consider raising the limit on all deposits. Meanwhile, an influential bloc of Republicans in the House of Representatives has already spoken out against a rate hike. This makes it difficult to imagine how a bill raising the limit would pass through the GOP-controlled House.
In Washington, the emergency deposit guarantees for SVB and Signature have sparked heated debate over whether big banks that have taken excessive risks will get a special bailout, while smaller banks are being forced to face an onslaught of withdrawals – sparked by public fears about the big banks – without special help.
“I’m very concerned,” said Republican Maine Senator Susan Collins. “It seems to me that all deposits are guaranteed [at SVB] that you create a situation where they are immune to losses… in a way that puts the well-run community bank at a competitive disadvantage. So I guess my question to you is, how is that fair?”
Yellen said regulators didn’t think about giving one bank an advantage over another at the time. At the time, they were thinking about “the impact on the broader banking system due to the potential for contagion,” she said.
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However, this explanation is not enough to satisfy small and medium-sized banks.
“If policymakers decide to offer unlimited deposit insurance to some institutions, they can’t leave out others — certainly not the community banks, which, as always, have been operating on a safe and sound footing,” said Rebeca Rainey, CEO of the Independent Community Bankers of America , said in a recent statement.
While Yellen ruled out universal blanket guarantees for deposits, she seemed open to other ways to help smaller banks offer additional insurance for large deposits.
A voluntary idea of West Virginia Senator Joe Manchin was to create a system where depositors who were required to hold cash above the FDIC’s $250,000 limit could pay slightly higher bank fees, similar to an insurance premium, to get a higher one Secure level of FDIC insurance.
“Shouldn’t I be able to buy or pay a slightly higher bank fee to get protection … capped at maybe $10 million?” Manchin told Yellen near the end of her testimony. “We talked…some senators talked back and forth…and I don’t think we should [craft legislation] without you all being involved and showing us how to structure it.”
“I think it’s very worthwhile for you and your colleagues to discuss what is appropriate here,” Yellen replied. “And we’d be more than willing to work with you to think this through.”
She added: “Right now we are trying to stabilize the situation with the means at our disposal.”
Those efforts are beginning to bear fruit, Yellen told a group of bankers on Tuesday. She said that “total deposit outflows from regional banks have stabilized.”
But while trends are moving in the right direction, the amount of money banks borrowed from the Fed’s discount window in the week ended March 15 set a new record at $153 billion, according to the Fed’s weekly report, a Sum that points to the banking sector is not quite stable yet.
Clarification: This story has been updated to clarify that Yellen made her comment about “flat-rate insurance” when answering a senator’s question about whether the Treasury Department would bypass Congress to insure all deposits.
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