House Freedom Caucus Opposes Unlimited Bank Deposit Guarantees

Rep. Scott Perry (R-Pa.) speaks during a news conference with members of the House Freedom Caucus outside the U.S. Capitol in Washington, on Feb. 28, 2022. Drew Angerer/Getty Images

House conservatives have voiced their opposition to any increased guarantees on bank deposits, which comes amid debate on whether expanding deposit insurance coverage is needed to stem a financial crisis marked by a drain of uninsured deposits away from smaller and regional banks.

A crisis of confidence in the banking sector was touched off earlier this month by the collapse of Silicon Valley Bank (SVB), with uninsured business depositors fleeing smaller community and regional lenders toward the biggest banks perceived as “too big to fail.”

This has led to calls for the Federal Deposit Insurance Corporation (FDIC) to temporarily waive its usual $250,000 deposit guarantee limit and provide blanket coverage to restore confidence and prevent bank runs.

Among voices calling for expanded deposit guarantees is the Mid-Size Banks Coalition of America. It said in a letter to Treasury Secretary Janet Yellen and key regulators that FDIC insurance should be extended to all deposits for two years to “restore confidence among depositors before another bank falls.”

But members of the House Freedom Caucus are opposed to raising the deposit coverage cap. They issued a statement on Monday, blaming “out-of-control spending in Washington” for the bank turmoil and saying they oppose any expansion of guarantees on bank deposits over the current limit.

“Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules,” the group said.

The House conservatives also said they want the Federal Reserve to “unwind” its emergency bank liquidity program—enacted in the wake of the SVB collapse—as soon as possible.

Expanded Coverage for SVB, Signature

The FDIC normally guarantees deposits up to $250,000 per depositor per account category. However, in the wake of the collapse of Silicon Valley Bank and Signature Bank, the FDIC acted on the basis of extraordinary “systemic risk” designations for the two institutions to waive the coverage cap.

Acting as receiver, the FDIC set up two bridge banks—Silicon Valley Bridge Bank and Signature Bridge Bank—and transfered to the newly created institutions all their respective customer deposits. The two bridge banks have continued operating as full-service banks, though a buyer has since been found for Signature Bridge Bank.

The FDIC extended its deposit insurance coverage at the two bridge banks to prevent an exodus of uninsured deposits since that would have stymied efforts at stabilizing their operations. Both banks had an unusually high proportion of uninsured deposits, meaning ones above the customary coverage limit of $250,000.

It’s a move reminiscent of the FDIC’s decision during the financial crisis of 2008–09 to expand its protection to unlimited deposit insurance for business checking accounts used for payroll and other operating expenses in order to prevent runs on smaller banks.

“We did this to protect community banks who were losing uninsured business customers to banking giants such as JPMorgan Chase and Wells Fargo,” former FDIC chair Sheila Bair wrote in a recent op-ed in the Financial Times.

“The program was successful in ending runs on community banks,” Bair added.

While Bair opposed SVB and Signature getting special treatment under systemic risk exemptions and their depositors getting bailed out by blanket coverage, she backed a temporary expansion of the FDIC’s cap across the entire U.S. banking sector as a confidence-building measure if the crisis worsens.

Former FDIC chair Sheila Bair attends the PBS 2023 TCA Winter Press Tour at The Langham Huntington, Pasadena, Calif., on Jan. 17, 2023. Alberto E. Rodriguez/Getty Images

Biggest Fear

Bair told Reuters in a recent interview that she opposed designating SVB and Signature as systemically important, and argued that the deposit insurance cap shouldn’t have been raised for the two banks.

She said the two failed banks could have been resolved through the FDIC’s normal takeover process, with uninsured deposits subject to a “haircut,” where a relatively small portion would be lost but depositors likely getting most of their money back over time as the recoveries process played out.

Bair said it wasn’t realistic for other banks to get one-off systemic risk designations like SVB and Signature did, and so if uninsured deposits start fleeing smaller banks, Congress should grant authority to the FDIC and the Treasury Department to temporarily guarantee all transaction accounts and uninsured deposits.

“My biggest fear now is that that lack of trust in the banking system takes hold and uninsured deposits start fleeing banks of all sizes to the biggest banks, just making them bigger again,” Bair told Reuters, “and that otherwise healthy banks get into trouble because their deposit base is unstable and running.”

There has been unconfirmed media speculation that U.S. officials were studying ways to temporarily expand the FDIC’s coverage to all deposits in the U.S. banking sector.

Expanding deposit guarantees would, under changes put in place in the 2010 Dodd-Frank financial reform law, require approval by Congress.

But with at least 37 Freedom Caucus members opposed, that could make passage difficult in the closely divided Republican-controlled House.

Rep. Patrick McHenry (R-N.C.), chairman of the House Financial Services Committee, said he would explore the adequacy of FDIC deposit insurance and the impact of raising the coverage cap.

McHenry said he wanted to weigh the trade-offs of higher deposit insurance limits, “the moral hazard of having more risk taking in the financial sector, and also the impact it would have on community banks.”

U.S. Rep.-elect Patrick McHenry (R-N.C.) delivers remarks in the House Chamber during the fourth day of voting for Speaker of the House at the U.S. Capitol Building in Washington, D.C., on Jan. 6, 2023. Chip Somodevilla/Getty Images

It’s unclear whether U.S. officials see an expansion of deposit coverage as necessary, given that steps taken by regulators so far seem to have shored up financial stability.

“Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed,” White House spokesman Michael Kikukawa told Bloomberg.

“We will use the tools we have to support community banks,” he added.

Yellen Says ‘Situation Stabilizing’

Yellen said Tuesday in excerpts of prepared remarks to an American Bankers Association conference that the situation in the U.S. banking system is “stabilizing,” but that further steps may be warranted if smaller banks suffer deposit runs.

“The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader U.S. banking system,” Yellen said in the remarks, which were released by the Treasury. “And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Yellen did not provide details on what further actions may be justified, but credited steps taken thus far for shoring up financial stability.

Rohit Arora, CEO and founder of Biz2Credit, whose company was a customer of SVB, said that he backs an expansion of the FDIC’s coverage cap.

“The first thing the government must do is quickly pass legislation enabling the FDIC to insure commercial deposits up to $10 million, which would cover 90 percent of businesses in this country. It would get bipartisan support,” Arora told The Epoch Times in an emailed statement.

“The banks will be able to charge a higher fee for this extended insurance, which has been far too low for well over a decade. Banks will pass along the costs to their commercial customers, and thus taxpayers will not have to foot the bill for this action,” he added.

Nathan Claire, founder and real estate investor at Buying Jax Homes, said that raising the coverage limit could help prevent panic withdrawals that can lead to bank runs and “exacerbate the financial crisis.”

Still, it’s a move that’s not without its downsides, he said, including incentivizing risky behavior.

“This could lead to the creation of a moral hazard, where banks are incentivized to take excessive risks with the expectation of a government bailout if things go wrong,” he told The Epoch Times in an emailed statement.

Claire also said blanket coverage could impose additional costs on bank customers through increased FDIC assessments.

Meanwhile, during a press briefing on March 20, White House press secretary Karine Jean-Pierre was asked if the Biden administration was supportive of a push from smaller banks to expand FDIC insurance beyond $250,000.

Jean-Pierrre replied by saying that there isn’t “any new announcement at this time” on the subject, while insisting that “Americans should be confident of their deposits” and that their deposits will “be there when they need them.”

She added that “our goal is to ensure the financial system is stable.”