July 21, 2023

ICYMI: At Hearing, Senator Warren Calls for Reform of Deposit Insurance to Ensure Stability of Banking System

Warren: “It’s time to reform deposit insurance so it isn’t another handout to the big guys.”

Video of Exchange (YouTube)

Washington, D.C. — At a hearing of the Senate Banking, Housing, and Urban Affairs Committee, U.S. Senator Elizabeth Warren (D-Mass.) called for reform of the deposit insurance system to hold big banks accountable and ensure the stability of our banking system. 

Specifically, Senator Warren called for reform to raise the FDIC insurance cap to protect business depositors at small banks, make Too Big to Fail banks and the banks with the highest levels of uninsured deposits cover more of the cost of increased insurance coverage, and strengthen oversight to ensure that banks don’t take advantage of this additional insurance to engage in riskier behavior.

Transcript: Perspectives on Deposit Insurance Reform after Recent Bank Failures
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Thursday, July 20, 2023

Senator Elizabeth Warren: Thank you very much, Mr. Chairman.

Throughout history, when rumors take off that banks may not have enough money to cover all their deposits, depositors rush to withdraw their money.  FDIC insurance was designed to reassure depositors that they will be fine, but the $250,000 cap means that bigger depositors – which can be small businesses, big businesses, nonprofits – are left exposed. These folks depend on their ability to access their money to cover their payroll, to cover rent and other expenses, so when they hear even a rumor of trouble, they rush to withdraw their money, causing a run that threatens the bank’s survival.  

Why do people listen to rumors of bank failures?  Why not?  The cost of moving an account from one bank to a bank that is more secure is very small.  So if people really are at risk for losing their money—or even temporary access to their money—why not get out while the getting is good?

Ms. DiVito, if a crisis hit the banking system, does history suggest a depositor—even a very big depositor—needs to worry about whether they will be able to access their money if it’s at a community bank?  

Emily DiVito, Senior Program Manager, Roosevelt Institute: More often than not, all failed bank depositors are eventually made whole through resolution or once the bank's assets are sold. That can take time. Sometimes weeks, months, years for depositors to get that money back, and that lag and general disruption can be incredibly harmful to businesses, especially larger depositors who need access to their funds. So depositors – large depositors – at smaller institutions would be right to worry.

Senator Warren: It’s not a huge risk, but it’s a real risk.  Since 2007, about 7% of failed banks had uninsured depositors that have still not fully recovered their money.

Now, Ms. DeVito, what about the giant banks? The Too Big to Fail banks?  Does history suggest that a depositor should worry—even a little—about deposits in excess of the $250,000 FDIC cap at those giant banks?

Ms. DiVito: No. The federal government has demonstrated that it will take actions to backstop depositors at the biggest banks no matter the financial cost. It then does recoup those losses by leveeing increased assessments, but those are spread across all banks. So this has created a system of implicit, unlimited coverage for the largest banks.

Senator Warren: So what that says is that when depositors trigger a run, they are actually acting rationally. These businesses flee to the place that they know their money will be ready for them, for-sure, 100% when they need it. 

And while my community bank down the street and JPMorgan Chase may have the same official $250,000 insurance cap on paper, the fact of the matter is, if the two go under water, the government’s throwing the unlimited insurance life vest to JPMorgan Chase. Depositors run to the giant banks because they know the government will bail them out.

Mr. Fraser, are the Too Big to Fail banks paying for this extra measure of insurance? 

Thomas J. Fraser, CEO, First Mutual Holding Co.: So from a transparency standpoint, I can speak about my bank and how much we pay into the system. We pay on average 7.7 basis points – is I think our premium that we last calculated. I know that all the institutions are subject to the same schedule of calculations related to the risks that are in place and – I'll get to your answer in a minute – and whether or not that deposit insurance scheme fully captured those implied guarantees and risks, it's beyond my ability.

Senator Warren: You just said it, though. Everybody is getting charged the same amount for these $250,000 caps. Only it turns out the Too Big to Fail banks are getting a whole lot more than a $250,000 cap. And what I’m worried about here is that we’re seeing the Too Big to Fail banks get unlimited  insurance without paying for it. And they are getting that benefit at a cost to community banks.  How do we know that? In the aftermath of the SVB crisis, the 25 biggest banks gained more than $100 billion in new deposits in the days after the SVB collapse, while the small banks – the ones below that level – lost more than $100 billion in deposits.

So how do we make sure that FDIC insurance isn’t structured to give a free bonus to the Too Big to Fail banks? 

Ms. DiVito, if we could provide a little more reassurance to the business and nonprofit depositors that their money will be protected by raising the insurance cap in the smaller banks, do you think they would be less likely to flee those smaller banks whenever they hear rumors of stress in the banking industry?

Ms. DiVito: Yes, ma’am. That's generally how deposit insurance works. The more money you know is safe, the less worried you are about it being at risk and the less inclined you are to engage in a bank run.

Senator Warren: It’s time to reform the deposit insurance system so it isn’t just another handout to the big guys. I think we should do three things:

First, raise the FDIC limit so that businesses can bank with community banks without the threat of business interruption during a crisis. 

Second, make the Too Big to Fail banks and the banks with the highest levels of uninsured deposits cover more of the cost of ensuring the stability of our banking system and the FDIC Insurance Fund. 

And third, tougher oversight to ensure that banks don’t take advantage of this additional insurance to engage in riskier behavior.

Thank you, Mr. Chairman.