Sen. Vance suggests providing unlimited deposit insurance coverage for community and small regional banks.

Leveling the Playing Field‍ in Banking

Senator​ J.D. Vance (D-Ohio) has introduced legislation aimed at creating a fairer banking system. The bill seeks to empower community and small regional banks, allowing them to compete ​more effectively against the big financial institutions that are⁢ considered “too big to fail.”

The Payroll Guarantee Act, submitted‍ on July 20, proposes extending unlimited deposit insurance to ​all non-interest-bearing transaction‌ accounts. This measure ​primarily targets business payroll and operating accounts and ‍applies​ to banks with a maximum of $225 billion in assets.

What’s more, the bill suggests that funding for the program ⁢will not involve fees charged to small and regional entities.

“Regional and community⁤ banks all over Ohio are suffering‍ from the unfair advantage held by their larger counterparts,” said Senator Vance in a​ statement.

“After the failures of ​Silicon Valley Bank and⁣ Signature Bank, we saw depositors at smaller institutions moving their holdings to⁣ larger institutions, benefiting the coastal elite at the expense of ⁣the heartland.

“This expansion of deposit insurance is crucial to ensuring⁢ the stability of community and regional banks and the health of the ‍wider U.S. banking system.”

Debate on Expanding Deposit Insurance

Since the aftermath ⁤of ‍the Silicon Valley ⁢Bank, Signature​ Bank, and First​ Republic failures,‌ there has been a debate among ‍Republican and Democratic lawmakers ​in Washington about expanding deposit insurance and reforming the program.

In ‍May, the Federal Deposit Insurance Corporation (FDIC) outlined three options to make changes to deposit insurance: bolster the insurance cap for banks’ business accounts, raise⁣ the deposit insurance ‌limit ‍to a higher figure, or eliminate the cap completely.

FDIC Chairman Martin Gruenberg noted that deposit insurance for business accounts maintained ⁤the “greatest⁣ potential for⁤ meeting the fundamental objectives ⁢of deposit insurance relative ‌to its costs.”

At a Senate Banking Committee hearing on July 20, Emily DiVito, ‍the senior program ⁢manager for corporate ‍power at The Roosevelt​ Institute, laid‌ out the pros and⁣ cons of increasing⁢ deposit insurance.

According to Ms. DiVito, an expanded deposit insurance initiative⁣ would “reduce the likelihood that ⁢depositors panic, and so reduces the risk of bank runs.”

“If deposit insurance were to be‌ expanded, for instance, to all non-interest-bearing accounts—which represent⁣ accounts that people use to keep their money safe and accessible rather than‍ as a source of investment than any depositor with balances ⁣over⁢ the cap with benefit—minimizing the number⁢ of depositors who can initiate a bank run would enhance financial stability objectives as well,” Ms. DiVito stated ⁤during the committee hearing.

The downside risk is that expanding‍ deposit insurance “could increase moral hazard.”

In economics, moral hazard refers to parties that do not‍ have incentives to ​shield against financial risk because they⁢ are protected from the consequences.

But Ms. DiVito suggested that⁣ moral hazard possibilities could be limited through tighter banking regulations and supervision, taking another ⁢look at capital requirements, and ensuring​ that⁣ deposit‌ insurance reforms are enforced through the FDIC.

Senator Tim Scott (R-S.C.) has‌ warned that any‍ proposal to reform the system will come with a cost.

“The​ bill always comes to you, and someone always has to pay for any⁢ proposed increases,” Mr. Scott said in⁢ his opening statement.

“Furthermore, the costs ⁢of these increases will most likely be borne by our small businesses, everyday consumers in the form of higher fees and potentially ​decreased credit availability.”

“Like any⁤ policy change, it’s important to carefully consider the potential ⁤consequences and ensure ‍that the benefits outweigh the costs.”