U.S. Studies Ways to Insure All Bank Deposits If Crisis Grows

U.S. officials are studying ways they might temporarily expand Federal Deposit Insurance Corp. coverage to all deposits, a move sought by a coalition of banks arguing that it’s needed to head off a potential financial crisis.

Treasury Department staff are reviewing whether federal regulators have enough emergency authority to temporarily insure deposits greater than the current $250,000 cap on most accounts without formal consent from a deeply divided Congress, according to people with knowledge of the talks.

Authorities don’t yet view such a move as necessary, especially after regulators took steps this month to help banks keep up with any demands for withdrawals, the people said, asking not to be named describing confidential talks. Still, they are developing a strategy out of due diligence in case the situation worsens.

“We will use the tools we have to support community banks,” White House spokesman Michael Kikukawa said, without directly addressing whether the measure is being studied. “Since our administration and the regulators took decisive action last weekend, we have seen deposits stabilize at regional banks throughout the country and, in some cases, outflows have modestly reversed.”

Still, the behind-the-scenes deliberations show there are concerns in Washington’s corridors of power as midsize banks call for broader government intervention after three lenders collapsed this month when uninsured depositors pulled their money, and as a fourth firm strives to avoid a similar fate. Shares of that one, First Republic Bank, have tumbled 90% since the start of the month as industry leaders tried to find a way to bolster the company’s finances.

Treasury Secretary Janet Yellen said the US is prepared to repeat the actions it took recently to protect bank depositors if smaller lenders are threatened, though she didn’t address the possibility of a temporary expansion in deposit insurance.

“Our intervention was necessary to protect the broader US banking system, and similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said, according to excerpts of remarks she’s set to give at a banking industry conference in Washington later Tuesday.

One legal framework under discussion for expanding FDIC insurance would use the Treasury Department’s authority to take emergency action and lean on the Exchange Stabilization Fund, the people said.

That fund typically is used to buy or sell currencies and to provide financing to foreign governments. But the fund, created in the 1930s, has been used as a backstop for emergency lending facilities by the Fed in recent years. It’s the only pot of money under the full authority of the Treasury secretary, with other spending and financing under the jurisdiction of Congress.

“Due to decisive recent actions, the situation has stabilized, deposit flows are improving and Americans can have confidence in the safety of their deposits,” a Treasury spokeswoman said in a statement.

Representatives for the FDIC and Fed declined to comment. The administration and independent regulators are grappling with the first banking crisis since the passage of the 2010 Dodd-Frank Act, a sweeping reorganization of the financial regulatory system.

‘Dangerous Precedent’

The Mid-Size Bank Coalition of America, which includes banks with assets of as much as $100 billion, urged regulators to lift the current cap on deposit insurance, according to a March 17 letter seen by Bloomberg. The organization expressed concern that, if another regional lender fails, more depositors will move their money to the nation’s largest banks, regardless of the underlying health of their smaller competitors.

While some lawmakers, including Republicans, have said they are weighing changes to the current $250,000 FDIC insurance cap, a number of House conservatives have come out against a 100% guarantee.

“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 House Freedom Caucus said in a statement.

Photo: The Federal Deposit Insurance Corp. headquarters in Washington, DC. Photographer: Al Drago/Bloomberg