The House Financial Services Committee (FSC) held a hearing titled “The Future of Deposit Insurance: Exploring the Coverage, Costs, and Depositor Confidence” on Nov. 18 to discuss the best courses of action for the U.S. deposit insurance system.
One of the most prominent themes was expanding coverage, especially for non–interest-bearing transaction accounts held by small businesses, nonprofits and municipalities. Several committee members and witnesses invited to speak at the hearing also cautioned against the potential for government overreach.
The hearing featured input from numerous banking executives and financial trade leaders, including Old National Bancorp Chairman and CEO James Ryan; Citizens Bank of Edmond President and CEO Jill Castilla; Texas Bankers Association President and CEO Chris Furlow; Americans for Tax Reform Founder and President Grover Norquist; and Paul Weiss Rifkind Wharton & Garrison LLP Partner and Co-Chair Financial Services Group Jarryd Anderson.
The committee and witnesses discussed proposals included in various bills aimed at improving the deposit insurance regime, including the Community Bank Deposit Access Act (H.R. 5317), the Keeping Deposits Local Act (H.R. 3234) and the Main Street Depositor Protection Act (S. 2999).
Ahead of the hearing, FSC Chair French Hill (R-Ark.) and other Republican members of the committee sent a letter to Federal Reserve Board (FRB) Vice Chair for Supervision Michelle Bowman, Comptroller of the Currency Jonathan Gould, and Federal Deposit Insurance Corp. (FDIC) acting chairman Travis Hill, calling for a regime tailored to account for an institution’s size and structure.
Specifically, they asserted the FRB should follow-through on a 2010 congressional directive to establish enhanced prudential standards (EPS) for banks with $50 billion or more in assets. The lawmakers noted that Congress provided discretionary authority to tailor application of EPS based on the statutory factors of “capital structure, riskiness, complexity, financial activities[], size, and any other risk-related factors that the [FRB] deems appropriate.”
“Unfortunately, since that time, the FRB’s discretionary authority to apply EPS to banks between $100 billion and $250 billion in assets and FRB’s manifestations of Congress’s mandatory tailoring directive have only resulted in a negligibly tiered application of EPS that still too closely resembles the one-size-fits-all approach that Congress explicitly rejected in 2018,” the lawmakers wrote.
The concept of a regime in which requirements are tailored based on the size and risk profile of an institution is far from new. One of the key proposals discussed during the hearing – a “two-step” modernization strategy – described such an approach as one of its core tenets.
The first step would be to create an Emergency Transaction Account Guarantee (E-TAG) as a proactive, temporary mechanism designed to stop deposit flight during episodes of systemic stress. The second step would involve a longer-term, data-driven modernization process, evaluating assessment thresholds, determining the costs of modernization and the appropriate structure for funding deposit insurance going forward, among other considerations.
Furlow expressed strong support for the two-step modernization strategy during his testimony, calling the current processes for addressing systemic risk “antiquated,” as they fail to “keep up with contagion that now runs at digital speed and with a 24-hour news cycle.”
“Deposit insurance is not a government bailout of banks. Banks pay deposit insurance premiums,” Furlow said. “Yet, as 2023 demonstrated, our community, mid-size and regional banks were not just put at risk, they were stiffed and are subject to ongoing reserve ratio premiums. At the time of the SVB and Signature Bank failures, the government could not say if it would follow through to protect those that paid deposit insurance. A comprehensive deposit insurance system for the 21st century should address this inequity.”
He noted this model is also supported by the Arkansas Bankers Association, the Colorado Bankers Association, the Kentucky Bankers Association, the Missouri Bankers Association, the Oklahoma Bankers Association and the New Hampshire Bankers Association.
The Independent Community Bankers of America expressed strong support for the targeted reforms included in these bills in a written statement ahead of the hearing. The trade association urged Congress to afford the FDIC more authority to act early during times of economic stress, including providing for pre-authorization for temporary guarantees rather than waiting for congressional intervention.
Rep. Frank Lucas (R-Okla.) argued that current FDIC insurance rules disadvantage smaller institutions. He noted that during the 2023 bank failures, larger institutions benefitted from systemic-risk backstops that smaller banks did not.
“When people hear that their deposits may be safer in a larger institution … our smaller banks are left at a competitive disadvantage,” he said.
A common theme throughout the debate was the importance of enacting reforms that might improve depositor confidence, curb too-big-to-fail advantages and avoid penalizing community banks through cost burdens.