Changes to the deposit insurance system are unlikely as congressional interest is waning, said FDIC Chair Martin Gruenberg on Sept. 28.
Gruenberg’s comments came months after the high-profile failures of San Francisco-based banks Silicon Valley Bank and First Republic Bank and New York City-based Signature Bank.
During his address at the International Association of Deposit Insurers 2023 Annual Conference, Gruenberg described the report the FDIC issued in early May which aimed to prevent similar future collapses.
Lawmakers initially called for changes to the deposit insurance system after the FDIC lifted its $250,000 limit to protect uninsured depositors at the three failed banks. In early May, the FDIC outlined three options to reform deposit insurance, including maintaining the current $250,000 limit; extending unlimited coverage to all depositors; and a targeted offering, where business payment accounts have much higher coverage than other accounts.
In the report, the FDIC favored the targeted option, noting that maintaining the status quo would not adequately address run risk.
“While there was considerable interest in the immediate aftermath of the bank failures earlier this year, that has dissipated with time,” Gruenberg noted. “At this point there does not seem to be any imminent likelihood of changes to deposit insurance coverage.”
The Republican-controlled House of Representatives and Democrat-controlled Senate haven’t committed to making any changes. On July 21, Sen. J.D. Vance (R-Ohio) introduced a bill that would grant unlimited deposit insurance to non-interest-bearing transaction accounts. The legislation, which would apply to banks with less than $225 billion in assets and all credit unions, remains unpassed.
To Gruenberg, the failures illustrated his belief that regional banks “pose distinct and significant challenges in resolution that could raise serious financial stability risks. In particular, the heavy reliance of regional banks on uninsured deposits for funding has the potential to create a destabilizing contagion effect on other banks if one regional bank were to fail and uninsured depositors took losses.”
“Both institutions were allowed to fail,” Gruenberg said. “Shareholders lost their investment. Unsecured creditors took losses. The boards and most senior executives were removed. The FDIC is conducting investigations, as it is legally required to do, to hold directors, officers, and executives accountable for losses and misconduct.”