Blog: Washington eyes new deposit guarantee – POLITICO – POLITICO

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An explicit, nationwide expansion of deposit insurance — an idea that seemed politically implausible a week ago — appears to be moving into the realm of the “maybe.”

  • There’s a new sense of urgency. The Mid-Size Bank Coalition of America is pressing regulators to extend FDIC insurance to all deposits for two years to halt an “exodus” of funds from smaller banks, Bloomberg reports.
  • Top lawmakers are leaving the door open. House Financial Services Chair Patrick McHenry said on “Face the Nation” Sunday that he has “not had a single conversation” with the Biden administration on changing the $250,000 cap on deposit insurance but that he plans to look into it. The administration isn’t dismissing the idea as of yet.

How did we get here?

A handful of policymakers immediately began floating a broad-based expansion of the deposit backstop — permanently or temporarily — at the beginning of last week. The idea took hold as smaller banks began to see customers fleeing for safety to larger banks, in particular “too big to fail” institutions.

  • Sen. Elizabeth Warren and former House Financial Services Chair Barney Frank have been at odds over what caused the meltdown but were two of the first prominent voices to say that the government should consider a bigger deposit guarantee for business accounts to help bring stability to payroll.
  • Rep. Blaine Luetkemeyer, who at first appeared to be a Republican outlier, rattled the financial policy bubble when he told our Eleanor Mueller last Tuesday that the U.S. should temporarily guarantee all deposits to avoid “a run on your smaller banks.” (We just posted Eleanor’s Q&A with Luetkemeyer on POLITICO Pro.)
  • Other Republicans are weighing the issue. Sen. Mike Rounds told Eleanor that one of the big questions for him is, “What do we do about guaranteeing deposits over a quarter of a million dollars, and how do we pay for it or how should we respond to it? … What’s the long-term alternative?”
  • Gary Cohn, the former Goldman Sachs exec and Trump NEC director, said Friday in a joint NYT op-ed with former SEC Chair Jay Clayton that deposit insurance should perhaps be raised to as high as $10 million. “This step reflects the reality that depositors cannot be expected to monitor the financial condition of banks as if they were sophisticated investors.”

What’s the cost, what’s covered and would it incentivize more risk-taking?

Small banks and a number of lawmakers are already raising red flags about who should fund a new deposit safety net and warning that it would incentivize poor management. Banks pay fees to maintain the deposit insurance fund, but their costs could be passed along to consumers. It could also trigger heightened bank regulation in exchange.

  • McHenry said Sunday: ”What I want to know is the trade-off … of moral hazard, of having more risk-taking in the financial sector, and also the impact it would have on community banks.”
  • The Independent Community Bankers of America has mounted an increasingly sharp-edged campaign to make the case that the smallest banks shouldn’t have to pay fees associated with shoring up deposits at bigger banks that failed. The group took a dig at Treasury Secretary Janet Yellen last week when she told lawmakers that only banks that posed systemic risks are eligible for a full deposit backstop.
  • ICBA senior executive vice president Anne Balcer told MM Sunday it may make sense for Congress to revisit the cap in light of growing deposit balances since it was last increased. But she said “the tone coming from Treasury of picking winners and losers defies logic and is largely inappropriate.”
  • “If the FDIC decides to provide unlimited deposit insurance for some institutions, even on a limited basis, they cannot discriminate and leave others out, particularly those that have been operating on a safe and sound basis such as the nation’s community banks,” Balcer said.
  • Others in ICBA’s orbit on Sunday pushed back hard as the debate took off again. The group’s former president and CEO, Cam Fine, tweeted: “The Siren song of 100% deposit coverage will lure the banking industry to its ruin on the regulatory and legislative rocks. It sounds so sweet, but is deadly to a free market banking system.”

Congress might seek new deposit insurance safeguards, too.

Rep. Andy Barr, who chairs the House subcommittee overseeing bank regulators, echoed community banks’ concerns in an interview with MM.

  • Barr said Congress should look at imposing new limits on the future use of the “systemic risk exception” that was invoked to back uninsured deposits at Silicon Valley Bank and Signature Bank.
  • Barr suggested rewriting the law to disincentivize uninsured depositors from parking cash at poorly managed banks, “so that in this scenario, for example, they could have taken care of the payroll but then a private insurance market would develop for some percentage of the uninsured deposits, so that the government guarantee is not 100 percent.”
  • “There is concern out there among community banks that do manage their interest rate risk well, that don’t have the massive asset-liability mismatches, that don’t have large amounts of uninsured deposits. There’s an understandable frustration they’re going to get an FDIC assessment to cover all of these uninsured deposits at SVB,” Barr said.

Pace yourself. It’s Monday. — I’m piloting solo this week, so please send tips to [email protected].

Monday … Ohio Gov. Mike DeWine and Energy Secretary Jennifer Granholm talk industrial policy in a WaPo virtual discussion at 2 p.m. … Tuesday … FOMC begins two-day meeting … Treasury Secretary Janet Yellen speaks at the American Bankers Association’s Washington summit in the morning … Wednesday Sherrod Brown, Maxine Waters, Tim Scott and Patrick McHenry speak at ABA’s conference … Senate Budget holds a hearing on how climate change is affecting insurance markets at 10 a.m. … Fed Chair Powell gives his post-FOMC presser at 2:30 p.m. … Yellen testifies at Senate Appropriations at 2:30 p.m. … Citi CEO Jane Fraser speaks at the Economic Club of Washington, D.C. at 5:45 p.m. … Thursday … Yellen testifies with OMB Director Shalanda Young and White House CEA Chair Cecilia Rouse at House Appropriations at 3 p.m. …

Will this do the trick? UBS to buy Credit Suisse Treasury Secretary Janet Yellen and Fed Chair Jerome Powell immediately endorsed the $3.25 billion sale, which entailed an emergency-rewrite of Swiss law to jam through the deal before markets opened Monday.

The Fed coupled the news with an announcement about plans to make it easier for foreign central banks to exchange their currencies for dollars, in a bid to ease strains on global funding markets.

Warren Buffet and the Biden administration have been in touch, according to Bloomberg, including discussions about the billionaire Berkshire Hathaway CEO possibly investing in regional banks.

The FT reported that BlackRock also explored a bid for the 167-year-old Credit Suisse. Blackrock CEO Larry Fink, who worked at an earlier incarnation of Credit Suisse’s investment banking business when it was First Boston, reportedly drove the potential bid.

Regional lender Flagstar bank agreed to buy “substantially all” deposits and certain loan portfolios held by Signature Bank, according to the FDIC. The agency estimates that Signature’s failure will cost the deposit insurance fund $2.5 billion. Flagstar’s bid did not include $4 billion in deposits related to Signature’s digital banking business.

The FDIC is planning to relaunch the SVB sale process, Reuters reports, with regulators considering a potential breakup.

Let the hearings begin House Financial Services will have FDIC Chair Martin Gruenberg and Fed Vice Chair for Supervision Michael Barr testify March 29 at the first in a series of hearings on what went wrong at Silicon Valley Bank and Signature Bank.

What McHenry wants to know From his CBS appearance: “We need to understand the decisions that were made last weekend, from Thursday until Sunday night, on whether or not there’s a viable private sector solution. We also need to understand the underlying causes of the collapse of these banks, and we’re going to get to that.”

Asked about anti-ESG attacks that fellow Republicans are firing off against the failed banks, McHenry said there “is substance here” but also that “everyone’s preaching their book.”

“When you have a hammer, you look at the world as a nail, and that’s what we see out of politicians. I’m trying to be of substance and focus on the issues at hand and make sure that we fix the problems.” (Read more about McHenry’s SVB-era political restraint here, ICYMI.)

Fed at the center of a firestorm Victoria Guida is out with a new piece on the external scrutiny and internal soul-searching facing the Fed, which is on lawmakers’ list of potential culprits in the banking collapse.

“The Fed has mishandled this about seven different ways,” says Wharton professor Peter Conti-Brown.

As a follow-up read, Americans for Financial Reform has a new blog post pushing back on banking industry arguments that the meltdown should be blamed on lax Fed supervision and not inadequate regulations — what the group calls a distraction “from a core problem of public policy.”

Democrats find a unifying message Democrats are split over whether to blame 2018 regulatory rollbacks, but they can agree on one thing: It’s time to go after bank executives.

President Joe Biden on Friday said Congress should impose tougher penalties on senior bank leaders whose mismanagement contributes to bank failures. Senate Banking Chair Sherrod Brown — who has said a legislative response to SVB would be tough — said he too would try to hold executives accountable.

Sen. Jon Tester, who is facing heat from the left for supporting the 2018 easing of bank regs, was one of the first senior Democrats to go after SVB’s executives, calling for regulators to claw back their bonuses on March 14.

Coinbase eyes overseas platform as U.S. cracks down Bloomberg reports that Coinbase has contacted institutional clients about plans to potentially set up a crypto trading service abroad. (ICYMI: Why the EU is looking appealing to some U.S. crypto firms.)

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