Hardline US Republicans oppose bank deposit guarantees beyond $250,000 limit

[March 21, 2023]  By David Lawder

WASHINGTON (Reuters) - Hardline Republicans in the House of Representatives on Monday vowed to oppose any universal federal guarantee on bank deposits above the current $250,000 limit, throwing a major roadblock to a key tool regulators could deploy if bank runs re-emerge as financial confidence wobbles.

The Republican House Freedom Caucus said in a statement the Federal Reserve "must unwind" its extraordinary funding facility created on March 12 that allows banks to boost borrowing from the Federal Reserve to cover deposit outflows.

"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.

Some bankers and banking trade groups have asked for universal guarantees from the Federal Deposit Insurance Corp (FDIC) to weather the crisis touched off earlier this month by the failure of Silicon Valley Bank. The upheaval has been marked by uninsured business depositors fleeing smaller community and regional lenders toward the largest banks perceived as "too big to fail."

The Mid-Size Banks Coalition of America said in a letter to U.S. Treasury Secretary Janet Yellen and key regulators they should extend FDIC insurance to all deposits for two years to "restore confidence among depositors before another bank falls," echoing a similar step taken during the financial crisis that erupted in 2008. The group is identified as a political action committee by government transparency group OpenSecrets.org.

Independent Community Bankers Association President Rebeca Romero Rainey said in a statement that depositors in safely run small banks should get the same guarantees that uninsured depositors in SVB and Signature Bank received.

Such a move, also recommended last week by former FDIC chief Sheila Bair, was done swiftly in 2008 but now requires approval by Congress in a streamlined resolution process - a change put in place in the 2010 Dodd-Frank financial reform law.

U.S. officials were studying ways they might temporarily expand FDIC coverage to all deposits, Bloomberg News reported on Monday, citing people familiar with the matter.

A sign reads “FDIC Insured” on the door of a branch of First Republic Bank in Boston, Massachusetts, U.S., March 13, 2023. REUTERS/Brian Snyder

APPROVAL DIFFICULTY

With at least 37 Freedom Caucus members in the closely divided but Republican-controlled House of Representatives, the secretive group of conservative Republicans could make passage difficult, especially with tensions running high over a debt ceiling standoff with Democrats.

Paul Kupiec, a former FDIC, International Monetary Fund and Fed official, said the Fed's actions to provide liquidity were helping to calm markets and bank customers, but pressures from a widening interest rate mismatch between bank deposits and bonds and loans on bank books would continue.

"My opinion is that this may be a lull," Kupiec, now a senior fellow at the American Enterprise Institute, said of the relative calm on Monday.

Runs could re-emerge if another bank falters, and if the institution is large enough, regulators will again declare a systemic risk exception and guarantee its uninsured deposits, he added.

U.S. officials acknowledge the volatility in the market, including another big drop in First Republic Bank shares, but say the outflow of deposits from many banks has stabilized or reversed - an indication that the need for emergency action may be waning.

Following deposits of $30 billion by large banks into First Republic last week, one U.S. official said discussions were continuing with banks and other private sector actors who were "looking at ways to provide both capital, deposits or looking at potential transactions in the banking sector, because they have confidence in the resilience of the banking sector."

"Given the stabilization in deposits and the fact that many institutions have liquidity to meet the needs, their uninsured depositors if they decided to leave, we feel better about where things are now, but we're of course going to remain vigilant during the next week," the official added.

(Reporting by David Lawder, additional reporting by Andrea Shalal; Editing by Lincoln Feast.)

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