The banking industry breathed a collective sigh of relief this week amid signs that regulators’ extraordinary actions to guarantee deposits at failed Silicon Valley Bank and Signature Bank of New York have helped quash potential runs on other U.S. banks.
Regional-bank stocks
KRE,
have stabilized, and community banks are reporting that their depositors are remaining loyal.
“We’re seeing from our community-bank members that deposits are holding strong, and anecdotally actually hearing some cases where they are gaining new depositors,” Rebeca Romero Rainey, president and CEO of the Independent Community Bankers of America, told MarketWatch.
Similar comments could be heard at a conference held this week by the American Bankers Association, where one community banker praised regulators’ actions as “courageous” and said they “contained what could have been a much worse situation.”
The industry is keeping its cards close to its vest, however, regarding the debate on reforms to avert the need for future bailouts of uninsured depositors.
“We are looking at the response for the long term, not just the immediacy of the current situation,” Romero Rainey said. “We have not come out with a specific position yet as it relates to what reform may be needed for deposit insurance. I think an important part of that is going to be a real analysis of what happened [at Silicon Valley Bank] and what the problem we’re trying to solve is.”
Leading Democrats and some Republicans have indicated a willingness to consider lifting the cap on deposit insurance or eliminating the cap entirely, although political considerations and gridlock in Congress make legislative changes unlikely.
“In Congress, talk is cheap,” Ben Koltun, director of research for Beacon Policy Advisors, wrote in a Wednesday note to clients. “There will be hearings, investigations, legislative text and lobbying campaigns … [but] no leader appears to be in a rush to pass anything.”
Eliminating the cap on deposit insurance has long been a policy goal of some left-leaning academics who study financial regulation. They see government-backed bank deposits as a key way to assert the public’s role in managing the money supply and as a means of forcing banks to pay in the form of higher fees for what they see as an implicit government guarantee of deposits.
“I think of all the segments of society, the financial sector doesn’t have a claim to public subsidies,” Morgan Ricks, a former Obama Treasury official and a law professor at Vanderbilt University, told MarketWatch. “Removing this subsidy would be unambiguously positive.”
But some lawmakers, including Sen. Elizabeth Warren, have come out against unlimited deposit insurance. The Massachusetts Democrat told Politico Wednesday that such a move would cause “real problems” and would benefit rich depositors.
Koltun added that these dynamics make it likely that any changes to federal bank policy will have to come from regulators, who will have to balance the perceived need for stricter oversight with the desire not to overburden smaller banks, which wield influence in Washington.
It is possible that banking industry solidarity may wane as regulatory reform takes shape, with small banks, larger regional banks and multinational behemoths like JPMorgan Chase
JPM,
or Citigroup
C,
disagreeing on fee assessments and the appropriate level of regulatory scrutiny for banks of different sizes.
“Community banks or smaller banks shouldn’t be forced to pay for the misdeeds of larger banks,” the ICBA’s Romero Rainey said, adding that her group would protest if recent bailouts required regulators to assess additional fees to replenish the federal deposit-insurance fund.
