Treasury Explores Emergency Powers To Expand FDIC Coverage Amid Contagion Concerns, Report Says

Topline

Officials at the Treasury Department are reportedly reviewing a potential temporary expansion of the Federal Deposit Insurance Corporation (FDIC) to cover all deposits in U.S. banks to help prevent a repeat of the Silicon Valley Bank collapse and stave off a wider crisis in the banking sector.

The Treasury Department is reportedly examining the use of emergency powers to expand FDIC coverage.

Los Angeles Times via Getty Images

Key Facts

According to Bloomberg, the Treasury Department is examining if federal regulators have the emergency power to temporarily insure deposits larger than the FDIC’s current $250,000 cap without seeking approval from Congress.

Treasury Secretary Janet Yellen told the Senate Finance Committee last week regulators will step in to protect all deposits at a bank beyond the FDIC’s cap, only if the failure of such a bank would pose a systemic risk to the economy.

Former FDIC director Sheila Bair also recommended a similar move, warning that not doing so will cause depositors to flee from midsize and smaller banks, making the biggest banks even bigger.

Under the 2010 Dodd-Frank Act, the federal regulators have the authority to raise their deposit cap to cover all accounts in case of a “liquidity event,” but only after an expedited vote by Congress.

Treasury Department staffers are exploring the possibility of using the federal agency’s emergency power and tapping into the Exchange Stabilization Fund—which is usually reserved for purchasing or selling foreign currencies, holding foreign exchange assets and financing foreign governments—to fund such a move.

Chief Critic

Last week, Euro Pacific Capital economist Peter Schiff was critical of the Biden administration’s decision to insure all depositors of the collapsed Silicon Valley Bank and Signature Bank, tweeting: “Bailing out depositors of failed banks is yet another mistake by the Fed & the U.S. Govt.” Warning that it could lead to “even greater instability in the banking system and larger future losses,” Schiff added, “The bailout means depositors will put their money in the riskiest banks and get paid higher interest…so in the long-run many more banks will fall, with far greater long-term costs.”

Crucial Quote

Yellen will speak to the American Bankers Association later Tuesday. According to an excerpt from her speech, the Treasury Secretary is expected to talk about potentially expanding SVB-like protections to depositors in smaller banks, saying: “Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

What To Watch For

Any effort to expand the FDIC limit to cover all deposits will likely face pushback from House Republicans. In a statement Monday, the hard-right House Freedom Caucus said: “Any universal guarantee on all bank deposits, whether implicit or explicit, enshrines a dangerous precedent that simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules.” The right-wing caucus with more than 40 members wields significant influence over House Speaker Kevin McCarthy (R-Calif.) and other top House GOP members. In the Senate, where Democrats hold a slim majority, Sens. Elizabeth Warren (D-Mass.), Mitt Romney (R-Utah) and Mike Rounds (R-S.D.) have spoken in favor of raising the FDIC limit.

Key Background

Last Sunday, the Treasury Department, along with the Federal Reserve and the FDIC, stepped in to protect all deposits at the collapsed Silicon Valley Bank and Signature Bank. The Treasury said it had taken the move to “protect the U.S. economy by strengthening public confidence in our banking system.” President Joe Biden backed the move, saying it was taken at his direction and was done to protect “workers, small businesses, taxpayers, and our financial system.” A day later, Biden noted that taxpayers will not have to foot the bill for the plan, as federal banking fees will finance it.