Sen. Vance Proposes Unlimited Deposit Insurance at Community, Small Regional Banks

Sen. J.D. Vance (R-Ohio) speaks at the Heritage Foundation's Leadership Summit in National Harbor, Md., on Apr. 20, 2023. (Terri Wu/The Epoch Times)

Sen. J.D. Vance (D-Ohio) introduced legislation to level the playing field in the banking system, enabling community and small regional banks to better compete against too big-to-fail financial institutions.

The Payroll Guarantee Act, submitted on July 20, would extend unlimited deposit insurance to all non-interest-bearing transaction accounts. The bill would mainly target business payroll and operating accounts and apply to banks with a maximum of $225 billion in assets.

Moreover, the bill hints that funding the program would not involve fees charged to small and regional entities.

“Regional and community banks all over Ohio are suffering from the unfair advantage held by their larger counterparts,” said Mr. Vance in a statement.

“After the failures of Silicon Valley Bank and Signature Bank, we saw depositors at smaller institutions moving their holdings to larger institutions, benefiting the coastal elite at the expense of the heartland.

“This expansion of deposit insurance is crucial to ensuring the stability of community and regional banks and the health of the wider U.S. banking system.”

Debate on Expanding Deposit Insurance

Since the aftermath of the Silicon Valley Bank, Signature Bank, and First Republic failures, there has been a debate among Republican and Democratic lawmakers in Washington about expanding deposit insurance and reforming the program.

In May, the Federal Deposit Insurance Corporation (FDIC) outlined three options to make changes to deposit insurance: bolster the insurance cap for banks’ business accounts, raise the deposit insurance limit to a higher figure, or eliminate the cap completely.

FDIC Chairman Martin Gruenberg noted that deposit insurance for business accounts maintained the “greatest potential for meeting the fundamental objectives of deposit insurance relative to its costs.”

At a Senate Banking Committee hearing on July 20, Emily DiVito, the senior program manager for corporate power at The Roosevelt Institute, laid out the pros and cons of increasing deposit insurance.

According to Ms. DiVito, an expanded deposit insurance initiative would “reduce the likelihood that depositors panic, and so reduces the risk of bank runs.”

A Silicon Valley Bank office in Tempe, Ariz., on March 14, 2023. (Rebecca Noble/AFP via Getty Images)

“If deposit insurance were to be expanded, for instance, to all non-interest-bearing accounts—which represent accounts that people use to keep their money safe and accessible rather than as a source of investment than any depositor with balances over the cap with benefit—minimizing the number of depositors who can initiate a bank run would enhance financial stability objectives as well,” Ms. DiVito stated during the committee hearing.

The downside risk is that expanding deposit insurance “could increase moral hazard.”

In economics, moral hazard refers to parties that do not have incentives to shield against financial risk because they are protected from the consequences.

But Ms. DiVito suggested that moral hazard possibilities could be limited through tighter banking regulations and supervision, taking another look at capital requirements, and ensuring that deposit insurance reforms are enforced through the FDIC.

Sen. Tim Scott (R-S.C.) has warned that any proposal to reform the system will come with a cost.

“The bill always comes to you, and someone always has to pay for any proposed increases,” Mr. Scott said in his opening statement.

“Furthermore, the costs of these increases will most likely be borne by our small businesses, everyday consumers in the form of higher fees and potentially decreased credit availability.”

“Like with any proposal, we must evaluate the benefits,” he added.

This is a subject that has been discussed in many other countries since the banking turmoil.

This past spring, Canadian Finance Minister Chrystia Freeland noted in the annual budget that the federal government might amend the Canada Deposit Insurance Corporation (CDIC) Act to “provide expanded authorities to increase deposit insurance and related measures in the event of a market disruption.”

The Hong Kong Deposit Protection Board recently announced a proposal to bolster the cap on deposit insurance from $63,990 to $102,386.

Refilling the Deposit Insurance Fund

The FDIC’s Deposit Insurance Fund (DIF) has taken an immense hit since the spring as the agency rescued insured and uninsured depositors. It has been estimated that saving SVB and Signature clients cost the DIF nearly $16 billion.

In May, the FDIC proposed applying billions of dollars in “special assessments” to the nation’s largest banks to recover the costs of bailing out depositors.

While the FDIC applied the “systemic risk exception” for the bailouts, it is also legally required to recover the costs by imposing a special assessment on the financial institutions.

Under the plan, the biggest banks with at least $50 billion in total assets would pay more than 95 percent of the special assessment to replenish the DIF.

“In general, large banks with large amounts of uninsured deposits are the principal beneficiaries of the systemic risk determination,” said Michael Spencer, associate director of the FDIC’s financial risk management branch, at a hearing.

“The largest banks also benefited the most from the stability provided to the banking industry under the systemic risk determination.”