The White House urged the extension of deposit insurance to stable banks

The Biden administration is under increasing pressure to call for an extension of the federal guarantee of bank deposits to bolster confidence in the financial system and prevent further distress at America’s regional banks.

Funded by banks, the Federal Deposit Insurance Corporation guarantees deposits up to $250,000. But a growing chorus of influential bipartisan lawmakers and banking lobbyists have called for increasing or suspending that limit in recent days.

“I think to raise the . . . the cap is a good step,” Sen. Elizabeth Warren, Democrat of Massachusetts, told CBS on Sunday. “$2 million? 5 million dollars? 10 minutes? Small businesses have to count on receiving money for payroll and utility bills. Nonprofit organizations should be able to do that,” he added.

The Biden administration is being forced to consider additional measures to protect banks after its moves last week, including guaranteeing all deposits at Silicon Valley Bank and Signature Bank and a Wall Street-led deposit infusion into First Republic Bank, failed to reassure investors on Friday.

Biden administration officials have not ruled out seeking to expand the FDIC’s insured deposit limit, which would require congressional approval, and have not taken a position on the matter. The White House and the Treasury declined to comment on Sunday.

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Any move to expand the FDIC’s deposit guarantee should be carefully weighed against concerns that it could encourage banks to engage in risky behavior, as well as the costs to banks and consumers, as they would likely involve higher fees. Rather than being a short-term solution, it could be part of the longer-term reforms being discussed following this week’s turmoil.

“You have to keep all options open, and that’s how I approach it. But if we do that, we need to understand their trade-offs. Allowing a larger set of insurance coverage is not a mere game. This represents a significant cost to the financial system, and especially to community banks. We’re going to have to take a very hard look at this,” Patrick McHenry, the Republican chairman of the House Financial Services Committee, told CBS.

Sherrod Brown, a spokesman for the Democratic chairman of the Senate Banking Committee, told the FT: “Senator Brown believes that American workers and their families should not have to pay for other people’s risky bets that don’t pay off – whether on Wall Street or in Silicon Valley. Any changes to deposit insurance should protect small businesses and workers, not big investors.”

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The push to expand FDIC insurance reflects the fragmented state of the U.S. banking industry, with an estimated 4,000 lenders overseen by the Federal Reserve.

While nearly half of the industry’s $31.4 billion in assets are concentrated at so-called global systemically important banks such as JPMorgan Chase and Bank of America, trillions of dollars are held by thousands of smaller lenders.

According to CFRA data, about 99 so-called regional banks with assets between $10 billion and $100 billion have $2.7 billion in assets, while about 3,500 “community banks” with assets under $10 billion each have a combined $2.8 billion in assets. and research service.

A coalition of mid-sized US banks has already sent a letter to regulators asking them to extend the insurance to two years for all deposits. “Doing so would immediately stop the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce the chance of further bank failures,” the group wrote, according to Bloomberg News.

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U.S. Treasury Secretary Janet Yellen has come under fire after she told Congress last week that uninsured deposits can only be guaranteed if U.S. officials and regulators, at the level of each bank, determine whether the financial system is systemic. risk. Made with SVB and signature.

Jefferies analysts said this week that the Fed’s lending to banks in need of short-term cash, along with other actions by the Treasury and the FDIC, will help ensure that further deposit withdrawals do not lead to more bank failures. However, Jefferies analysts argued that current events foreshadow a possible credit crunch for small businesses in the near future.

“Regional banks that have [fuelled] the recovery of small businesses that has been ongoing since the pandemic will be much more limited in their ability and willingness to lend, regardless of their deposit stability or the Fed’s access to liquidity,” Jefferies wrote.

Additional reporting by Colby Smith in Washington