WASHINGTON — Federal bank regulators are not considering any 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 kind of a universal deposit guarantee after the government refunded most of the uninsured deposits at two banks that collapsed earlier this month, California-based Silicon Valley Bank and New York-based Signature Bank.
In response to a direct question about whether Treasury would circumvent Congress to insure all deposits, Yellen replied: “I have not considered or discussed anything having to do with blanket insurance or guarantees of all deposits.”
Yellen made the comment to senators during a hearing on Capitol Hill to consider the Treasury Department’s 2024 budget request.
The statement fueled a decline in the stock market, and a drop in regional bank shares.
Congress has broad authority over the FDIC insurance limit, currently set at $250,000 as part of the Dodd-Frank financial reforms. Congress can also temporarily suspend the limit, like it did in 2020 as part of the government’s response to Covid-19.
This time around, only a handful of Democrats have openly suggested Congress consider raising the limit across all deposits. An influential bloc of House Republicans, meanwhile, has already come out against any hike. This makes it difficult to envision how a bill to raise the limit would pass the GOP-controlled House.
In Washington, the emergency deposit guarantees made for SVB and Signature have set off a fierce debate over whether big banks that took excessive risks got a special bailout, while smaller banks are being forced to confront a rush of withdrawals — triggered by public fears about the big banks — without any special help.
“I’m very troubled,” said Maine Republican Sen. Susan Collins. “It seems to me, by guaranteeing all of the deposits [at SVB] that you’re creating a situation where they are immune from losses … in a way that puts the well managed community bank at a competitive disadvantage. So I guess my question to you is, how is this fair?”
Yellen said that at the time, regulators weren’t thinking about giving one bank an advantage over any other bank. At the time, they were thinking about “the implications for the broader banking system because of the contagion potential,” she said.
That explanation has not been enough to satisfy small and mid-sized banks, however.
“If policymakers decide to provide unlimited deposit insurance to some institutions, they cannot leave others out—certainly not the community banks that have, as always, operated on a safe and sound basis,” Rebeca Rainey, CEO of the Independent Community Bankers of America, said in a recent statement.
While Yellen ruled out universal blanket deposit guarantees, she appeared to be open to other potential ways to help smaller banks offer additional insurance to large deposits.
One idea volunteered by Democratic West Virginia Sen. Joe Manchin was to create a system where depositors who needed to keep cash in excess of the $250,000 FDIC limit could pay slightly higher bank fees, akin to an insurance premium, in order to secure a higher level of FDIC insurance.
“Shouldn’t I be able to buy or pay a little higher bank fee, to get protection … with a cap maybe at $10 million?” Manchin said to Yellen near the end of her testimony. “We’ve been talking … some senators have been talking back and forth … and I don’t think we should [craft legislation] without you all involved, showing us how to structure that.”
“I think this is very worthwhile, for you and your colleagues to be discussing what’s appropriate here,” Yellen replied. “And we would be more than willing to work with you to think this through.”
She added: “For the moment, we’re trying to stabilize the situation using the tools at our disposal.”
These efforts are starting to bear fruit, Yellen told a bankers group Tuesday. She said that “aggregate deposit outflows from regional banks have stabilized.”
But while the trends are moving in the right direction, the amount of money banks borrowed in the week ending March 15 from the Fed’s discount window set a new record at $153 billion, according to the Fed’s weekly report, a sum that suggests the banking sector is not quite stable yet.