WASHINGTON — Regulators' preferred fix for deposit insurance limits in the wake of several bank failures would need to make it through a divided Congress, a tricky proposition that still has a long way to go on Capitol Hill.
The Federal Deposit Insurance Corp. on Monday
The FDIC alone cannot make those changes, however, and will rely on Congress to pass some kind of legislation to make that happen.
Analysts expect that process to be difficult, but not impossible. Jaret Seiberg, a managing director at Cowen Washington Research Group, said that moderate Democratic and Republican lawmakers would have to unite with leadership to get something through.
"We are less worried about opposition from other members of Congress as there will be conservative Republicans who oppose any deposit insurance expansion and progressive Democrats who will want to extract a price for their support such as compensation clawbacks for executives at banks that suffer financial losses."
The agency gave three possible solutions, including maintaining the status quo and extending unlimited deposit insurance, but appeared to favor a suggestion that would target expanded deposit insurance to some kinds of accounts, including those held for business payments.
"Business payment accounts pose greater financial stability concerns than other accounts, given that the inability to access these accounts can result in broader economic effects," FDIC Chairman Martin Gruenberg said in a statement accompanying the report. "In addition, business payments accounts may pose a lower risk of moral hazard, because those account holders are less likely to view their deposits, using a risk-return tradeoff, than a depositor using the account for savings and investment purposes."
Such a change wouldn't be without precedent: President George W. Bush temporarily increased the insurance limit from $100,000 to $250,000 per depositor during the 2008 financial crisis in the Emergency Economic Stabilization Act. That became permanent with the Dodd-Frank legislation, which Congress passed in 2010.
In fact, the insurance limit has been raised seven times since 1950.
Rep. Brad Sherman, D-Calif., a longtime leader on banking issues in Congress and the ranking member on the Capital Markets Subcommittee, said in an interview that he'd support some kind of expanded insurance on some kinds of accounts, but cautioned that Congress is "very early in the process" of discussing those changes.
Sherman said that accounts that primarily deal with payroll and either aren't interest bearing, or are very low interest bearing, could be eligible for some kind of expanded deposit insurance.
"It should be the nature of the account that matters rather than the nature of the depositor," he said. "But we're talking about pretty much the same thing."
Republican lawmakers were more tepid with their response, but didn't dismiss the idea out of hand.
"I appreciate the FDIC putting forward solutions on this matter as it's become clear uninsured deposits played a role in the volatility over the last few months," said Rep. Blaine Luetkemeyer, R-Mo., another longtime House Financial Services lawmaker and the chairman of the Subcommittee on National Security, Illicit Finance, and International Financial Institutions, in a statement provided to American Banker.
House Financial Services Committee Chairman Rep. Patrick McHenry, R-N.C., said that it's "concerning" that the FDIC considered only public sector solutions as a "viable option, rather than considering private sector options that address the specific needs of large companies."
"I'm glad to see the FDIC recognize that any changes to deposit insurance must come from Congress in the form of legislation," McHenry said. "As we evaluate proposals about deposit insurance, it's critical that policymakers be thoughtful and deliberate. As the FDIC's own report notes, expanding deposit insurance includes tradeoffs, including costs imposed on customers and significant moral hazard risks."
