Midsize banks ask for extended FDIC insurance, but regulators take their time mulling over options

Article by Jenna McNamee | Mar 22, 2023

The news: A banking industry trade group asked US financial regulators to expand deposit insurance to cover all deposits for two years, per Bloomberg. The group received a vague and not very confidence-instilling response.

Fully insured: The Mid-Size Bank Coalition of America (MCBA) submitted a letter to financial regulators asking to federally insure all deposits for the next two years.

The group argued that the insurance guarantee will immediately restore confidence in the banking system and will halt the outflow of deposits from smaller banks and into the country’s biggest four banks.
The coalition also suggested that banks themselves fund the increased insurance coverage by upping the deposit-insurance assessment on banks that opt to participate in the extended coverage.

Sticking to her guns: At an American Bankers Association conference, in prepared remarks that seemed to address the coalition’s request, Treasury Secretary Janet Yellen emphasized the stability of the US banking system.

She stood by financial regulators’ recent actions regarding Silicon Valley Bank and Signature Bank intended to instill public confidence in the banking sector.
She also noted that regulators may take additional steps to protect deposits at smaller banks if the threat of a bank run would result in further contagion.
Yellen also made it clear that the rescue measures are not designed and enacted to favor specific types or classes of banks, and that banks of all sizes are integral to the US banking system.

Her statements don’t differ much from the message she delivered last week in her first appearance since SVB and Signature collapsed. Unfortunately, those statements haven’t been enough to quell on-edge customers and stop the rapid outflow of deposits from smaller banks.

What are regulators’ options? While the banking sector nervously awaits additional fallout, regulators are contemplating their options.

As the MCBA has noted, the FDIC could temporarily agree to cover all deposits, including those over the current FDIC limit of $250,000.
Alternatively, the FDIC could raise its deposit insurance level. Senator Elizabeth Warren argued this point, specifically for small businesses, suggesting the level be raised to an amount between $2 million and $10 million.
The FDIC could also reenact the Temporary Liquidity Guarantee Program that was created during the 2008 financial crisis. Part of this program guarantees all domestic noninterest-bearing deposits, and could be reinstated under the CARES Act.
The Fed could also assist by financing securities that are valued at a discount at par, or issuing zero-interest convertible notes for banks in trouble.

The big takeaway: The banking system may be calming down, but it’s far from quiet. Any further sign of distress could spook customers again and spark a series of bank runs that could put a lot of stress on small and midsize banks. Yellen’s vague remarks have also created uneasiness, as regional banks fear financial regulators have the power to pick and choose which banks win and lose. Regulators seem to be playing it by ear and hoping the panic blows over. But their lack of a clear plan may come back and bite them in the form of more bank collapses.