Deposit insurance coverage, in the wake of recent failures of three large regional banks, was a common theme among federal financial regulators as they testified before a House committee Tuesday.
In testimony before the House Financial Services Committee (as part of a semi-annual regulatory review), leaders of the Federal Deposit Insurance Corp. (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and the National Credit Union Administration (NCUA) all signaled that changes to how deposit insurance is granted and administered is important to staving off such failures in the future.
The failures of Silicon Valley Bank (SVB) of Santa Clara, Calif., Signature Bank of New York, N.Y. (both in March), and First Republic Bank of San Francisco (which failed early this month) have all been linked to large holdings of uninsured deposits in the banks. Other factors were also at play in the failures, the regulators noted, including capital requirements and investment powers. However, deposit insurance was common to all regulators’ comments.
FDIC Board Chairman Martin Gruenberg indicated to the committee that targeted coverage for different levels of insurance coverage across different types of accounts, and focusing on higher coverage for business payment accounts, may be the best path forward. Other approaches, he said, include limited deposit insurance coverage (which maintains the current structure of deposit insurance in which there is a finite deposit insurance limit and possibly higher than the current $250,000 limit by ownership rights and capacities); and unlimited deposit insurance coverage, which extends unlimited deposit insurance to all depositors. Gruenberg said targeted coverage for business payment accounts captures many of the financial stability benefits of expanded coverage while mitigating many of the undesirable consequences.
“Because losses on uninsured deposits associated with business payments are most likely to create spillovers, providing higher coverage on these deposits increases financial stability without expanding the safety net more broadly,” Gruenberg said. “Relative to savings and investment accounts, business payment accounts are less likely to seek yield and are more difficult to diversify across banks in the current system to obtain full deposit insurance. However, there are significant unresolved practical challenges to targeted coverage, including defining accounts for additional coverage and preventing depositors and banks from circumventing differences in coverage.”
Federal Reserve Board Vice Chair for Supervision Michael Barr concurred with Gruenberg’s view, generally, about deposit insurance reform, noting that an evaluation of how liquidity risk is supervised and regulated, starting with risk of uninsured deposits, should be conducted. “For instance, liquidity requirements and models used by both banks and supervisors should better capture the liquidity risk of a firm’s uninsured deposit base,” Barr said. “We should also consider applying standardized liquidity requirements to a broader set of banks.”
Acting Comptroller of the Currency Michael Hsu, the third of the three federal banking regulators represented, agreed that deposit insurance coverage should be updated. “The FDIC’s recent report on deposit insurance is worth careful consideration, especially its conclusion regarding targeted expansion,” Hsu said. “In the meantime, we have been working with our banks, especially those with significant levels of uninsured deposits, to ensure that their cash holdings and borrowing capacity can meet depositor withdrawals.”
While the National Credit Union Administration (NCUA), as the federal regulator for credit unions, was not directly affected by the failure of the three banks, its board chairman did weigh in about how reforming deposit insurance at banks would affect credit unions.
“NCUA defers to Congress on determining what statutory changes, if any, should be made to deposit insurance coverage levels and account types,” said NCUA Board Chairman Todd Harper. “But, if Congress does act in this area, the NCUA has two requests. First, we ask Congress to maintain parity between the share insurance coverage provided by the NCUA and the deposit insurance coverage provided by the FDIC.”
He also said that because an expansion in coverage will generally increase resolution costs, his agency requests greater flexibility for administering the National Credit Union Share Insurance Fund (NCUSIF), the federal fund that insures savings in credit unions.
“This flexibility, which would be more in line with the FDIC’s current administrative powers, includes allowing the NCUA Board to establish a higher normal operating level and modifying the current limitations on assessing premiums,” Harper said.
FDIC Board Chairman Martin Gruenberg
Federal Reserve Board Vice Chair for Supervision Michael S. Barr
Acting Comptroller of the Currency Michael Hsu
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