House Freedom Caucus Opposes Unlimited Bank Deposit Guarantees

The House Freedom Caucus has expressed its disagreement with expanding guarantees on bank deposits as they blame the “out-of-control spending in Washington” for the current state of turmoil in banks. This comes as smaller establishments experience a drain of uninsured deposits, which led to the discussions on whether deposit insurance coverage should be extended to restore trust and prevent bank runs. While the FDIC has been urged to temporarily waive its usual $250,000 deposit guarantee limit and provide blanket coverage to all deposits, the Freedom Caucus opposed the idea of raising the deposit coverage cap.

The JPMorgan Chase and Wells Fargo have become more appealing to uninsured business depositors as they are perceived as “too big to fail.” The Mid-Size Banks Coalition of America has also joined the voices calling for expanded deposit guarantees. The group has written a letter to Janet Yellen and other key regulators, urging them to extend FDIC insurance to all deposits for two years to restore confidence among depositors.

However, House Freedom Caucus members issued a statement blaming overspending by the government, and they are against expansion guarantees on bank deposits beyond the current limit. According to the group, such guarantees would enshrine a risky perspective that would incentivize future irresponsible behavior to be paid for by those who followed the rules. The Freedom Caucus also wants the Federal Reserve to end its emergency bank liquidity program enacted after the Silicon Valley Bank failure as soon as possible. 

Expanded Coverage for Silicon Valley Bank (SVB), Signature Bank

The FDIC usually guarantees deposits up to $250,000 per depositor per account category. However, after the collapse of Silicon Valley Bank and Signature Bank, the FDIC acted via extraordinary “systemic risk” designations for the two institutions by waiving the coverage cap.

As a receiver, the FDIC created two bridge banks—Silicon Valley Bridge Bank and Signature Bridge Bank—and transferred all their respective customer deposits to the newly created entities to continue full-service banking operations. Even though there has been a buyer for Signature Bridge Bank, the FDIC maintains its deposit insurance coverage on both bridge banks since such coverage prevents uninsured deposits from fleeing the establishments and leads to stabilization in their operations by preventing bank runs. It’s a move reminiscent of one the FDIC made during the 2008-2009 financial crisis when it expanded its protection to unlimited deposit insurance for business checking accounts used for payroll and other operating expenses.

Meanwhile, former FDIC chair Sheila Bair argues in a recent op-ed in the Financial Times that Congress should grant authority to the FDIC and the Treasury Department to temporarily guarantee all transaction accounts and uninsured deposits in case uninsured deposits start fleeing smaller banks. Bair supports proposals for the FDIC to increase its deposit insurance cap across the U.S. banking sector for a short-term period to boost confidence in banks given the recent wave of bank failures.

The Future of FDIC Coverage

While debate regarding expanded deposit guarantees continues, some experts say further action may be required if smaller banks suffer deposit runs. According to Janet Yellen, further moves could be warranted if smaller institutions suffer deposit runs that pose a risk of contagion. However, it remains unclear if U.S. officials see an expansion of deposit coverage as essential. Steps taken by regulators so far align with the goal of achieving financial stability even though media outlets have reported speculations that U.S. officials may investigate ways of temporarily expanding the FDIC’s coverage to all deposits in the U.S. banking sector. Nonetheless, this would require approval by Congress, which may not be forthcoming given that at least 37 Freedom Caucus members oppose the idea of expanding deposit guarantees.