In the months before Silicon Valley Bank’s collapse, the bank’s lobbying groups fought a proposal requiring financial institutions to increase payments into the Deposit Insurance Fund (DIF) that protects depositors from bank failures, according to federal records we reviewed.
As lawmakers now face calls to expand deposit insurance to stave off a wider bank run, the battle shows why that insurance has remained limited — and why any new initiative to require banks to pay for more such insurance could face obstacles in Washington. Put simply: powerful banking interests and their allies in Congress have made clear they oppose measures that would force banks to pay higher premiums in order to fund depositors’ insurance.
On Sunday, federal regulators announced an emergency action that “fully protects all depositors” at the bank, and they pledged that “any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks.”
Last year, bank lobbying groups mobilized against the Federal Deposit Insurance Corporation’s (FDIC) proposal to raise banks’ insurance premiums to shore up that deposit fund’s reserves, which had fallen below the minimum required by law.
Lobbying groups representing Silicon Valley Bank, or SVB, argued that risk of bank failures is low and insisted that requiring banks to pay more into the fund would harm financial institutions’ bottom lines.
“Numerous other enhancements to prudential standards have encouraged banks to strengthen their balance sheets and risk management,” said an August 2022 letter to regulators from lobbying 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 increase would unduly burden banks and may harm the broader economy.”
Nonetheless, soon after the bank industry’s letter, a group of senior Republican House lawmakers — including some of the chamber’s top recipients of banking industry campaign cash — parroted the financial industry’s rhetoric in their own missive demanding that regulators back off.
“It’s certainly ironic that Silicon Valley Bank’s lobbying groups were trying to shortchange the Deposit Insurance Fund just as their deposits might need to call on it,” Todd Phillips, a former FDIC attorney, told us about the lobbying push.
Despite the pressure, the FDIC finalized the proposal in October, asserting that it was necessary to maintain statutory minimums and guarantee banks were adequately insured in the case of collapse.
“The increased assessment revenue will strengthen the DIF at a time of significant downside risk to the economy and financial system,” said FDIC chairman Martin Gruenberg in a statement on the final rule.
“Used to Pay Deposit Insurance in the Event of Failure”
Last week, SVB, a top lender to tech startups and venture capital firms, became the second-largest bank to collapse in US history. Amid a run on its deposits, California regulators shut down the bank and the FDIC took it over.
The FDIC was set up in the wake of the Great Depression to take over failing 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 off the bank’s assets to cover as much of the remaining, uninsured deposits as possible.
Insured depositors are paid out of the DIF, a pool of money that is funded by bank premiums and interest. SVB’s insured deposits — less than 10 percent of the bank’s overall deposits — will be paid out from this fund.
During the 2008 financial crisis, so many banks failed that the DIF ran dry — and ended up with a negative $21 billion balance. As part of the subsequent Dodd-Frank reforms, lawmakers increased the amount that banks had to pay into the DIF, known as the “deposit insurance reserve ratio” — the ratio of DIF reserves to overall insured deposits — from 1.15 percent to 1.35 percent.
The FDIC maintains this ratio by adjusting insurance assessment rates. Last July, the agency announced it would be increasing the premium by two basis points.
“The proposal is intended to increase assessment revenue in order to build the DIF, which is used to pay deposit insurance in the event of failure of an insured depository institution,” the FDIC said in its notice of proposed rulemaking.
The agency estimated that the assessment increase would reduce bank earnings by an average of 1.2 percent of their income, and pointed out that bank earnings had been strong in recent quarters.
“It Is in Their Best Interests to Allow the Fund to Naturally Recover”
The banking industry fought the proposed rule, arguing that it would hurt bank earnings more than the FDIC had estimated and that capital ratios for banks were adequately strong to protect against potential bank failures.
“Although we support the continued strength and resiliency of the DIF, such an aggressive assessment rate increase is unwarranted,” said the letter from the bank lobby groups.
Republican lawmakers also pushed back against the FDIC’s proposal to increase assessment rates.
“We are concerned that an increase in the assessment rate at this time could pose real harm to consumers, particularly those with low and moderate incomes who may need access to credit,” said a comment on the proposed rule from Republican representatives Blaine Luetkemeyer and Ann Wagner of Missouri, Andy Barr of Kentucky, Bill Huizenga of Michigan, and Tom Emmer of Minnesota. “It is in their best interests to allow the fund to naturally recover over time as deposits run off.”
The five lawmakers received a combined $942,000 of campaign donations from the banking sector in the 2022 election cycle.
The FDIC finalized the rule despite the opposition. The banking industry groups that had opposed the assessment — the Bank Policy Institute, American Bankers Association, Consumer Bankers Association, Independent Community Bankers of America, and Mid-Size Bank Coalition of America — called the final rule a “preemptive strike against a nonexistent threat.”
The DIF had a balance of $128 billion at the end of 2022, a tiny fraction of the $9.9 trillion of insured bank deposits in the United States.
Meanwhile, Democratic representative Josh Gottheimer of New Jersey, a financial industry ally, is calling on Congress and regulators to consider temporarily raising the $250,000 limit on deposit insurance. Phillips, the former FDIC attorney, warned on Twitter that such an increase would require stricter regulatory oversight and higher assessment rates, so that banks weren’t making riskier bets with the knowledge that their loans were being insured.