Hardline US Republicans Oppose Bank Deposit Guarantees Above $250,000 Limit

By David Lawder

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

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

“Any universal guarantee on all bank deposits, whether implied or explicit, sets a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved and who have 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 triggered by the bankruptcy of Silicon Valley Bank earlier this month. The turmoil was marked by uninsured corporate depositors fleeing smaller community and regional lenders to 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 that they need to expand FDIC insurance on all deposits for two years to “restore depositor confidence before another bank collapses”, following a similar step taken during the financial crisis that broke out in 2008. The group is identified as a political action committee by the transparency group OpenSecrets.org.

Rebeca Romero Rainey, president of the Independent Community Bankers Association, said in a statement that savers from safely managed small banks should get the same guarantees that uninsured savers got at SVB and Signature Bank.

Such a move, also recommended last week by former FDIC chief Sheila Bair, was swiftly made in 2008 but now requires congressional approval in a streamlined resolution process — an amendment introduced in the Dodd-Frank financial reform bill of 2010.

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


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 as tensions run high over a debt ceiling standoff with the Democrats.

Paul Kupiec, a former FDIC, International Monetary Fund and Fed official, said the Fed’s actions to provide liquidity helped calm markets and bank customers, but the pressure of a widening interest rate mismatch between bank deposits and bonds and loans on bank books would hold .

“My view is that this may be a break,” Kupiec, now a senior fellow at the American Enterprise Institute, said of the relative calm on Monday.

Runs could re-emerge if another bank fails, 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 volatility in the market, including another major drop in shares of First Republic Bank, but say deposit outflows from many banks have stabilized or reversed — an indication that the need for emergency action may be diminishing.

Following $30 billion in deposits from major banks in First Republic last week, a US official said talks continued with banks and other private sector actors “looking at ways to provide both capital and deposits or potential transactions in the banking sector. because they have confidence in the resilience of the banking sector.”

“Given the stabilization of deposits and the fact that many institutions have liquidity to meet the needs, their uninsured depositors if they decide to leave, we feel better about the way things are now, but we will of course remain vigilant during the next week,” the official added.

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






Leave a Reply

Your email address will not be published. Required fields are marked *