Gruenberg: Congress probably won't alter deposit insurance

Bloomberg News

WASHINGTON — Federal Deposit Insurance Corp. Chairman Martin Gruenberg said Thursday his agency is unlikely to make changes to deposit insurance — something they can only do with congressional approval — given lawmakers' waning interest in passing legislation on the issue.

"While there was considerable interest in the immediate aftermath of the bank failures earlier this year, that has dissipated with time," he said. "At this point there does not seem to be any imminent likelihood of changes to deposit insurance coverage in the U.S."

In the speech, delivered to the International Association of Deposit Insurers 2023 Annual Conference, the FDIC chairman recounted his agency's experience earlier this year with three historically large bank failures and the FDIC's subsequent issuance of three proposals in May offering suggestions for reforming deposit insurance to avoid future contagion. 

The FDIC report suggested three paths forward: maintaining the deposit insurance status quo, providing all accounts unlimited deposit insurance and targeted insurance for businesses. While the agency had asserted they were considering each option carefully, the report noted a preference for targeted insurance. Gruenberg reiterated Thursday, as he did in May, that any changes to deposit insurance coverage would be contingent on Congress passing legislation authorizing such reforms. With a looming election, government shutdown and split Congress, the chairman's remarks further emphasize how long the odds are that such proposals could gain traction.

Silicon Valley Bank's March failure was triggered when a substantial loss on SVB's sale of securities and subsequent drop in the banks' share price eroded depositor confidence and initiated a bank run.

The FDIC initially moved to establish a self-liquidating vehicle to resolve the bank known as a Deposit Insurance National Bank in an attempt to assure depositors would be able to access their insured funds, but uninsured depositors — whose deposits still constituted the vast majority of the firm's liquidity — still faced potential losses.

This prospect of uninsured losses caused contagion at other regional banks with similar vulnerabilities — including Signature Bank, which also had over 90% uninsured deposits. The firm experienced heavy withdrawals before its ultimate failure just two days after SVB's collapse. Once the prospect of systemic risk became apparent, he said, federal financial regulators in consultation with the president decided to invoke a systemic risk exception. Such an exception allowed for the FDIC to extend deposit insurance protection to all depositors of SVB and Signature Bank, regardless of whether those deposits were above the $250,000 statutory insured limit. The FDIC as receiver then chartered two bridge banks to provide interim banking services to the failed institutions' customers and began searching for potential buyers for the bridge banks.

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New York Community Bank's subsidiary, Flagstar Bank — a regional bank with a similar business model to Signature — ultimately purchased the failed bay area bank a week after it was placed in receivership and another regional bank, North Carolina-based First Citizens Bank, purchased SVB within two weeks of the bridge bank being set up. 

In his remarks, Gruenberg made clear that despite the systemic risk exception, the banks were allowed to fail, wiping out the bank's shareholders' investments.

"It is important to recognize that both institutions were allowed to fail," he said. "Shareholders lost their investment [and] unsecured creditors took losses."  

He also mentioned the closure of another firm which relied heavily on uninsured deposits: First Republic Bank, which failed after battling for months with the contagion effects of the two prior failures. First Republic was ultimately sold — under a purchase and assumption agreement with the FDIC — to JPMorgan Chase. While the bank failed, the deposit insurance system held up and regulators successfully sold the failed bank without the invocation of a systemic risk exception. 

Momentum for post-bank failure legislation in response to recent regional bank failures in the United States has been dwindling on Capitol Hill largely because legislator's most important stakeholders — their constituents and voters — were mostly unaffected by the failures. While the Senate Banking Committee recently marked up a bill to claw back compensation for failed bank executives, more comprehensive changes like those to deposit insurance have since fallen by the wayside. With congressional reforms likely off the table, Gruenberg signaled that regulators will instead focus on utilizing the power they currently have — like improving the timeliness of supervision of liquidity and uninsured deposit levels. Regulators have already proposed rules revising capital and long-term debt requirements for regional banks.

"The effectiveness of deposit insurance depends on how it interacts with other aspects of the banking regulatory system," he said. "Regulation and supervision play an important role in supporting the financial stability objective of deposit insurance and limiting risk-taking that may result from moral hazard."