At Hearing, Senator Warren Calls for Reform of Deposit Insurance to Ensure Stability of Banking System
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"Thank you very much, Mr. Chairman.
Throughout history, when rumors take off that banks may not have enough money to cover all their deposits, depositors rush to withdraw their money. FDIC insurance was designed to reassure depositors that they will be fine, but the $250,000 cap means that bigger depositors -- which can be small businesses, big businesses, nonprofits -- are left exposed. These folks depend on their ability to access their money to cover their payroll, to cover rent and other expenses, so when they hear even a rumor of trouble, they rush to withdraw their money, causing a run that threatens the bank's survival.
Why do people listen to rumors of bank failures? Why not? The cost of moving an account from one bank to a bank that is more secure is very small. So if people really are at risk for losing their money--or even temporary access to their money--why not get out while the getting is good?
Ms. DiVito, if a crisis hit the banking system, does history suggest a depositor--even a very big depositor--needs to worry about whether they will be able to access their money if it's at a community bank?
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It's not a huge risk, but it's a real risk. Since 2007, about 7% of failed banks had uninsured depositors that have still not fully recovered their money.
Now, Ms. DeVito, what about the giant banks? The Too Big to Fail banks? Does history suggest that a depositor should worry--even a little--about deposits in excess of the $250,000 FDIC cap at those giant banks?
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So what that says is that when depositors trigger a run, they are actually acting rationally. These businesses flee to the place that they know their money will be ready for them, for-sure, 100% when they need it.
And while my community bank down the street and JPMorgan Chase may have the same official $250,000 insurance cap on paper, the fact of the matter is, if the two go under water, the government's throwing the unlimited insurance life vest to JPMorgan Chase. Depositors run to the giant banks because they know the government will bail them out.
Mr. Fraser, are the Too Big to Fail banks paying for this extra measure of insurance?
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You just said it, though. Everybody is getting charged the same amount for these $250,000 caps. Only it turns out the Too Big to Fail banks are getting a whole lot more than a $250,000 cap. And what I'm worried about here is that we're seeing the Too Big to Fail banks get unlimited insurance without paying for it. And they are getting that benefit at a cost to community banks. How do we know that? In the aftermath of the SVB crisis, the 25 biggest banks gained more than $100 billion in new deposits in the days after the SVB collapse, while the small banks -- the ones below that level -- lost more than $100 billion in deposits.
So how do we make sure that FDIC insurance isn't structured to give a free bonus to the Too Big to Fail banks?
Ms. DiVito, if we could provide a little more reassurance to the business and nonprofit depositors that their money will be protected by raising the insurance cap in the smaller banks, do you think they would be less likely to flee those smaller banks whenever they hear rumors of stress in the banking industry?
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It's time to reform the deposit insurance system so it isn't just another handout to the big guys. I think we should do three things:
First, raise the FDIC limit so that businesses can bank with community banks without the threat of business interruption during a crisis.
Second, make the Too Big to Fail banks and the banks with the highest levels of uninsured deposits cover more of the cost of ensuring the stability of our banking system and the FDIC Insurance Fund.
And third, tougher oversight to ensure that banks don't take advantage of this additional insurance to engage in riskier behavior.
Thank you, Mr. Chairman."
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