"Banking is a confidence game," as Pershing Square CEO Bill Ackman
But act how, exactly? According to industry lobbyists, the answer should be to guarantee even more bank deposits than our government already does. Certainly, there is precedent for this response — federal deposit guarantees began in the wake of the 1929 stock market crash, and the cap was hiked most recently to $250,000 per depositor per bank in the throes of the 2008 Wall Street crash. The latter instance was
Increasing the cap — whether through a permanent hike to $1 million, $2 million or even $10 million, as some in the business have suggested, or to infinity for a two-year period
Indeed, it's not just depositors who gain confidence from this system. Banks themselves benefit enormously. Deposits are typically the lowest-cost source of capital that banks have, and they leverage those funds to lend many times over, which is how they make their money. The government allows banks to stamp their product with a seal bearing the government's Federal Deposit Insurance Corp. logo, and a statement that deposits are insured up to $250,000, "backed by the full faith and credit of the United States government."
Insuring deposits is just one way in which the government supports the banking industry. The government charters banks and provides them access to additional funds through the Federal Reserve's discount window and other facilities. The government explicitly and implicitly encourages people to put their money in banks, including by conducting research on how to reduce the number of unbanked and underbanked people.
This government-backed banking system results in millions of people putting their money in banks: FDIC deposit insurance covers more than 827 million accounts with
Discussions of the idea of expanding the deposit insurance cap have mostly been fixated on depositor and business confidence. That focus omits vital public interest questions. In fact, the value of the subsidy has been the rationale — the quid pro quo — for requiring public policy outcomes from banks, including the Community Reinvestment Act, the Home Mortgage Disclosure Act and other requirements that banks serve the public interest.
So why then are the very same banks that are desperately seeking to increase deposit insurance — a tacit admission that their profits depend on government backing — fighting the government's efforts to improve data collection, ensure fair lending and enhance their community reinvestment requirements?
Both the American Bankers Association and the Consumer Bankers Association are
Trade groups don't sue for their own gain, of course. They sue on behalf of their member banks — including the very same banks now hoping to harvest expanded government subsidies from this spring's sectoral crisis.
The fintech Zepz has added a new remittance method with an FDIC-backed mobile bank account.
That's like your kid telling you they need a bigger allowance but will no longer do their chores — and in fact that they think you don't even have the right to make rules under your own roof.
And let's be clear about the specific nature of this petulant defiance: Banks' representatives at the bar are rejecting any duty to redress past wrongs against both lower-income neighborhoods and communities of color. Congress and the courts have repeatedly said the financial industry owes Black America because of at least a half-century of
Banks now want out of that basic covenant — and want the government to make sure they remain profitable by keeping their stream of low-cost funding flowing, by insuring deposits at a higher level.
It's worse than biting the hand that feeds you — it's polluting the soil that's allowed you to grow. Indeed, the banking industry has shown time and time again that it relies upon strong regulatory oversight to prevent bad actors from blowing up the whole industry and ruining the economy. The CFPB and the rules they and other banking agencies have put in place are in fact part and parcel of ensuring confidence in the banking system.
The banks want us to shore up depositor confidence by expanding deposit insurance, but how can the public have confidence in them when they are fighting to dismantle and weaken the very agency explicitly created because financial institutions abused consumers so badly that it caused a worldwide recession? How can we have confidence if they want to hide the ball about how much small-business lending they're doing, and to whom?
If the government is going to back deposits at a higher level, banks need to earn that extra subsidy by getting serious about underwriting the public good. Any deposit insurance hike should be conditioned upon the banking trades ending their assault on the CFPB, as well as a strengthening of CRA oversight.
I cannot, and will not, support a bill otherwise. No politician that truly cares about consumer protection should either.
Responsible actors in the banking industry will hasten to say that they do not oppose the CFPB, and also that they did not cause the recent problem. I suggest they put their money where their mouths are. Are CBA and ABA member banks comfortable with simultaneously arguing for more public subsidy and less responsibility to that public — particularly to people that banks historically excluded from the banking system? If not, why are they paying those organizations to do something they disagree with?
If we've learned anything from recent history, it's that banking is a team sport: What one bank does affects all others. It's time for banks to police their own and put an end to the assault on the CFPB.
And if they won't? Then perhaps there are a few banks that shouldn't exist.
