In the months before Silicon Valley Bank’s collapse, bank lobby groups fought proposals requiring financial institutions to increase payments to a Deposit Insurance Fund that protects depositors from bank failures, according to federal records reviewed by Lever.
As lawmakers now face calls to expand deposit insurance to prevent a wider bank run, the battle shows why it remains limited — and why any new initiative to require banks to pay more for such insurance could face a hitch in Washington. Simply put: Powerful banking interests and their allies in Congress have made it clear that they oppose measures that would force banks to pay higher premiums to fund depositor insurance.
On Sunday, federal regulators announced emergency measures that “fully protect all depositors” at banks, and they pledged that “any loss of the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment at the bank.”
Last year, bank lobby groups mobilized against a Federal Deposit Insurance Corporation (FDIC) proposal to increase bank insurance premiums to shore up those deposit funds, which had fallen below the minimum required by law.
The lobbyist group representing Silicon Valley Bank, or SVB, argues that the risk of bank failure is low and insists that requiring banks to pay more into the fund is detrimental to financial institutions’ profits.
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“Many other improvements to prudential standards have prompted banks to strengthen their balance sheets and risk management,” said an August 2022 letter to regulators from lobby groups including the American Bankers Association, the Bank Policy Institute, and the Mid-Size Bank Coalition of America, all of which count Silicon Valley Bank as a member. “The proposed hike would be too much of a burden on banks and could harm the wider economy.”
At the time, the Deposit Insurance Fund (DIF) had less than $126 billion to insure nearly $10 trillion in America’s insured savings, meaning the reserve ratio was below the statutory minimum of 1.35 percent.
Nonetheless, in the immediate aftermath of the bank industry letter, a group of senior Republican House of Representatives lawmakers – including some of the banking industry’s top campaign coffers – parroted the rhetoric of the financial industry in their own official letter demanding that the regulator step down.
The SVB also directly lobbied the FDIC last fall during the rulemaking period, according to a filing reviewed by Lever.
“It is ironic that the Silicon Valley Bank lobby group is trying to reduce the Deposit Insurance Fund as their savings may require,” said Todd Phillips, a former FDIC attorney. Lever about the lobby push.
Despite the pressure, the FDIC finalized the proposal in October, asserting that it was necessary to keep the statutory minimum and the guarantee bank adequately insured in the event of a collapse.
“Increased valuation revenue will strengthen DIF at a time of significant downside risks to the economy and financial system,” FDIC Chair Martin Gruenberg said in a statement about the final rule.
“Used To Pay Deposit Guarantee In Case Of Failure”
Last week, Silicon Valley Bank, a top lender to technology startups and venture capital firms, became the second-largest bank collapse in US history. Amid running out of his savings, California regulators closed the bank and the FDIC took over.
The FDIC was founded after the Great Depression to take over bankrupt banks and protect depositors. When a bank like SVB fails, the FDIC gives depositors access to $250,000 of their funds immediately, and then sells the bank’s assets to cover as much of the remaining uninsured deposits as possible.
Insured depositors are paid from DIF, a pool of money funded by bank premiums and interest. SVB-insured deposits—less than 10 percent of a bank’s total deposits—will be paid out of this fund.
During the 2008 financial crisis, so many banks failed that DIF dried up — and ended up with a negative balance of $21 billion. As part of the subsequent Dodd-Frank reforms, lawmakers increased the amount that banks had to pay into the Deposit Insurance Fund, known as the “deposit insurance reserve ratio” — the ratio of DIF reserves to overall insured savings — from 1.15 percent to 1. .35 percent.
The FDIC maintains this ratio by adjusting insurance rating rates. Last July, the agency announced it would raise premiums by two basis points.
“This proposal is intended to increase valuation revenue for establishing DIF, which is used to pay deposit insurance in the event of an insured depository institution failure,” the FDIC said in a notification of the proposed rulemaking.
The agency estimates that the increased valuation will reduce bank earnings by an average of 1.2 percent of their income, and indicates that bank earnings have been strong in recent quarters.
“It Is In Their Best Interest To Let Funds Recover Naturally”
The banking industry resisted the proposed rule, arguing that it would hurt banks’ earnings more than the FDIC had expected and that the ratio of capital to banks was strong enough to protect against potential bank failures.
“While we support DIF’s continued strength and resilience, such an aggressive increase in the rating rate is unwarranted,” said the letter from the bank’s lobby group.
Republican lawmakers also rejected the FDIC’s proposal to increase the rating rate.
“We are concerned that the current increase in rating rates could have a real toll on consumers, particularly those on low and moderate incomes who may need access to credit,” comments on the proposed rule from Republican Rep. Blaine Luetkemeyer (Mo.), Ann Wagner (Mo. .), Andy Barr (Ky.), Bill Huizenga (Mich.), and Tom Emmer (Minn.). “It is in their best interest to allow funds to recover naturally over time as deposits are depleted.”
The five lawmakers received a combined $942,000 in campaign contributions from the banking sector in the 2022 election cycle.
The FDIC finalized the rule despite opposition. Banking industry groups opposed to the assessment—Bank Policy Institute, American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and the Mid-Size Bank Coalition of America—call the latest rule a “preemptive strike against a non-existent threat.” .”
Now, the FDIC is trying to sell SVB to pay off uninsured depositors. At the end of 2022, more than 90 percent of SVB’s $175 billion deposit is uninsured by federal agencies.
The Deposit Insurance Fund has a balance of $128 billion at the end of 2022, a fraction of the $9.9 trillion in insured bank deposits in the United States.
Meanwhile, Rep. Josh Gottheimer (DN.J), a financial industry ally, is call Congress and regulators are considering temporarily increasing the $250,000 limit on deposit insurance. Phillips, former FDIC attorney, be warned on Twitter that such an increase would require stricter regulatory oversight and higher rating rates, so that banks don’t make risky bets in the knowledge that their loans are insured.