Bank Chiefs Push Lawmakers on Deposit Backstop in Wake of SVB

Bank CEOs told lawmakers at a Senate Committee hearing Wednesday (Sept. 10) that deposit insurance reform is urgently needed in the wake of the Silicon Valley Bank collapse of 2023.

Titled “Evaluating Perspectives on Deposit Insurance Reform,” the hearing spotlighted that the banking turmoil of 2023 shone a spotlight on the shortcomings of the current system and featured recommendations for modernization.

A Former Regulator’s Caution

Nicholas J. Podsiadly, former general counsel of the FDIC and current partner at Jones Day, provided a historical perspective, highlighting that the 2023 failures of Silicon Valley Bank (SVB), Signature Bank and First Republic Bank were the largest U.S. bank collapses since the 2008 financial crisis.

A key lesson was the FDIC’s invocation of the “systemic risk exception” for SVB and Signature Bank to “guarantee all deposits—including those above the standard $250,000 insurance limit,” per Podsiadly’s remarks, which was a temporary measure, but not a permanent increase in the $250,000 limit.

Podsiadly recounted the FDIC’s May 2023 report outlining three options for deposit insurance reform: Limited coverage, maintaining the current framework but potentially with a higher limit; unlimited coverage for all depositors; and targeted coverage, where “business payment accounts receive significantly higher coverage than other accounts.”

He noted that Congress had not yet adopted any of these. While acknowledging the “significant merits” of proposed legislation to increase deposit insurance for operational accounts, he raised questions about the cost to the financial sector as a whole and whether current “asset thresholds included in the proposed legislation are sufficient given growth of the financial sector indexed to inflation.”

The Critical Middle at Risk

Bob Harrison, CEO of First Hawaiian Bank, and also representing the Mid-Size Bank Coalition of America, said during his remarks that there’d been “rapid digital-age deposit flight” in March of 2023, and said “in an era of smartphones and social media, confidence can evaporate in hours or minutes—depositors no longer wait in line outside a branch; they tap a screen and billions can vanish almost instantly.”

He said, too, that “the 2023 turmoil did not see deposits leave the U.S. banking system— they left smaller banks for the perceived safety of larger ones,” creating a system where larger banks have a backstop but smaller banks “must pay a premium to retain uninsured funds.”

To address this, Harrison urged targeted, statutory expansion of FDIC deposit insurance coverage for business operating accounts, specifically for “non-interest-bearing transaction accounts that businesses use for day-to-day cash management.” He recommended raising the insurance cap for these business accounts “from the current $250,000 to at least $20 million per account.”

CEO of Detroit-based First Independence Bank Kenneth Kelly, speaking for the American Bankers Association (ABA), emphasized that the failure of SVB in March 2023 “renewed questions about whether deposit insurance coverage levels are keeping pace with the needs of all depositors.”

He stressed the need for “a more robust and transparent process” around systemic risk determinations and the subsequent special assessments levied on banks.

Regarding coverage, the ABA has advised that regulators ensure the coverage limit and any modifications to it are empirically based and indexed to inflation, with expanded data collection and stakeholder input.

National Security and Main Street at Risk?

Peter Rice, CEO of Hanscom Federal Credit Union, asserted that “implicit guarantees for ‘too-big-to-fail’ banks” pose a “threat … for Main Street and our National Security.”

The crisis, he said, demonstrated that “if you’re big, you’re safe; if you’re local, you’re at risk.”

He cited examples of payroll companies like Patriot Software and Rippling, whose client funds were frozen at SVB, impacting thousands of small businesses and their employees. He also highlighted the “national security issue” when small defense suppliers “nearly missed payroll because their cash was tied up at Silicon Valley Bank.”

Rice called for targeted coverage for business payment accounts to “protect deposits used for payroll, payables and taxes.” He also advocated for measures to defend supply chains; in that instance the Department of Defense would offer emergency financing to ensure payrolls and contracts would be honored and paid.

There were some notes of caution during the hearing and via lawmakers’ remarks. In his opening statement, Committee Chairman Sen. Tim Scott 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.”

During the post-testimony question and answer session with the witnesses, Scott asked about what limits should be vs. the costs.

“We think it should be empirically based,” responded Kelly, “and there is more data that we need to look at,” in an environment where only about 57% of business operating accounts are covered by current limits. Harrison said that a $20 million limit would (according to surveys of his coalition’s members) would cover about 98% of operating accounts.