On Bankers’ Minds: Deposit Insurance and Regulatory Overload

Community bankers have a lot of ideas for Congress and regulators to think about, including a suggestion for a new program to help guard against deposit flight. They are bracing for more legislation and more regulation, but also have a lot of questions about what that should look like. Here’s an overview of what’s on the minds of bankers across the country.

The talk of bankers across the country is about what will happen in Washington in coming months, as Congress and regulators dissect the failure of two large regional banks.

They have good reason to be worried. Banking laws and regulations affect all institutions, and “unintended consequences” are common. There’s also the possibility that field examiners will be harsher — whether on their own or under orders to get tough.

“There’s a one-size-fits-all theory, but in reality one size never fits all,” said one community banker, expressing pity for those who have upcoming examinations. “I’m thankful that I’ve already had my exam this cycle.”

Bankers have been talking about the fallout from the failure of Silicon Valley Bank and Signature Bank at industry events, on social media, and in conversations with The Financial Brand. The topics run the gamut: Should the government revive programs from the financial crisis to help protect banks from deposit flight? Instead of reacting merely to the crisis of the moment in considering regulatory changes, shouldn’t there be a comprehensive look at all the dramatic ways that the industry has changed over the past decade? Should bank size be taken into account, to avoid a heavier regulatory burden that forces more community bank consolidation?

Here’s an overview of the hot topics and the general sentiment.

Reactions to the Fed’s Bank Term Loan Program

The extraordinary actions that federal regulators took during the crisis are getting just as much attention from bankers as the outlook for future action.

The Federal Reserve’s Bank Term Loan Program got their approval. Still, none of the bankers who expressed support had any immediate plans to use it. The emergency program gives both banks and credit unions a way to boost their liquidity without having to sell securities at a loss, prompting a few bankers to dub it “another tool in our toolbox.”

Their worry is that the program has the potential to cast a shadow on banks that use it, similar to what happened during the financial crisis with the Troubled Asset Relief Program, or TARP.

Word will come out eventually. According to the Fed’s FAQ about the program, disclosures will be made a year after the program comes to an end. “This disclosure will include names and identifying details of each participant in the facility, the amount borrowed, the interest rate or discount paid,” and information about the collateral pledged, the Bank Term Loan Program FAQ says.

Presumably the idea is that today’s sensitive atmosphere will have eased by that time. But veteran bankers are still smarting from what happened with TARP. They recall that regulatory officials actually strongarmed them to participate in TARP to help bolster confidence in the financial system, even though their banks didn’t need the money. In fact, the nine largest institutions were basically told by Washington that they had to take TARP money. Not long after, TARP went from being a patriotic duty to a magnet for public anger.

But bankers agree that this new program helped calm the markets — which they uniformly appreciate. The Fed’s message was, “‘unlike Silicon Valley Bank, you don’t need to sell your securities at a loss. You can pledge them at face value,'” said A. Scott Anderson, the president and chief executive officer of the $90 billion-asset Zions Bank in Salt Lake City. “That is significant.” (Anderson spoke at the American Bankers Association’s Government Relations Summit.)

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Fear of a Heavier Regulatory Burden and Higher Costs

Fairness is a theme that comes up repeatedly with bankers, even outside the context of what’s ahead in examinations.

One target of these complaints: A special deposit insurance assessment is in the offing to replenish the Deposit Insurance Fund following the resolutions of Silicon Valley and Signature banks. More than 90% of the deposits at both banks were uninsured, but federal regulators invoked a “systemic risk exception” to cover all depositors in full. They also decreed that all banks would pay for it through the Federal Deposit Insurance Corp.

“Community banks didn’t cause this crisis and we shouldn’t have to pay to replenish the Deposit Insurance Fund,” said Brad Bolton, the president and CEO at the $182.7 million-asset Community Spirit Bank in Vina, Ala.

“Every penny matters in this environment. The extra money I’m going to have to pay into this assessment, that’s money that could have gone into a donation to my community or into developing a new product,” said Sharon Anderson, president and CEO of the $210.8 million-asset Williamstown Bank in West Virginia.

“The extra money I’m going to have to pay into this assessment, that’s money that could have gone into a donation to my community or into developing a new product.”
— Sharon Anderson

But what bugs her just as much is the disparity in treatment between how these two large regional banks were handled versus the typical community bank. “If this was my bank, FDIC wouldn’t be coming in to save the day. I would be laid out to dry,” said Anderson.

“It’s not a taxpayer bailout,” she added. “But at the end of the day, it’s a bailout on my dime.”

The FDIC plans to share details about the special assessment in May, per Chairman Martin Gruenberg’s congressional testimony and there are rumors that it is exploring ways to put more of the burden of the assessment on large banks.

Read More: 3 Effective Tactics to Calm Customer Fears in a Banking Crisis

Is It Time to Give Banks Another ‘TAG’ Program?

An idea that some think has merit in the current atmosphere is a revival of the Transaction Account Guarantee Program, or TAG. This program, used during the financial crisis, applied to ordinarily uninsured deposits. It guaranteed in full all domestic noninterest-bearing transaction deposits as well as certain other accounts. The initial program became available in fall 2008 and, after two extensions, expired at the end of 2010.

In contrast to TARP, banks that used TAG put banners on their websites, back in the day, to promote the extra coverage that was available.

When introduced, TAG usage was free for a month and then FDIC implemented a fee. An FDIC history of the financial crisis indicates that 86% of institutions eligible for TAG coverage stuck with the program and that it was particularly popular with banks and savings institutions with less than $10 billion in assets.

“The program was intended to encourage customers to keep their deposits in their bank and thereby avoid runs at healthy banks,” the FDIC paper states. Given the uncertain economic conditions, the concern was that “without the guarantee, banks could lose many small-business accounts (including payroll accounts), which frequently exceed the insurance limit of $250,000.”

This was the first time the FDIC had offered coverage above its statutory limit, according to the paper. Initially the cost to the banks was 10 basis points, later increased to a range of 15, 20 or 25 basis points depending on the individual institution’s deposit insurance risk rating. The program was replaced under the Dodd-Frank Act by a guarantee of all uninsured noninterest-bearing transactions accounts, paid for by the Deposit Insurance Fund, that ran for 2011 and 2012.

Several bankers suggested the TAG program could help again. “I don’t know why we did away with it,” said Frank Sorrentino, chairman and CEO at the $9.6 billion-asset ConnectOne Bancorp in Englewood Cliffs, N.J.

Many small businesses, even family-owned ones, have deposits of more than $250,000, he said. TAG, or something like it, would be reassuring for them.

But Sorrentino’s bank offers its customers a solution in the meantime. ConnectOne participates in an interbank program that facilitates deposit insurance protection up to $150 million per customer — a message that the bank continues to share often.

Read More: 8 Deposit-Raising Tactics You Might Not Be Trying

Banks: Think Reform Over Carefully, Congress

What the country doesn’t need is a snap reaction to recent events, James Edwards Jr., an Alabama community banker, told attendees at the ABA Government Relations Summit. He is one of many bankers who said they feel adding more regulations, on top of the plethora that already exists, should be done advisedly.

“I would encourage lawmakers to really consider this over time and to have some thoughtful discussion. And if there is consensus there, then fantastic,” said Edwards, CEO of the $1.2 billion-asset United Bank in Atmore, Ala.

During a panel discussion with Edwards, Zions’ Scott Anderson suggested that federal stress test requirements, which focus on credit crises and recessions, provide “an incentive for some banks to invest in long-term securities to make up for falling interest rates.”

A quick legislative reaction — while a tempting idea for bankers who would prefer to be done with it — poses risks, cautioned Laurie Stewart, president and CEO of the $976.5 million-asset Sound Community Bank in Seattle. (All three bankers are former chairs of ABA.)

“There is a risk with us, as bankers, rushing to have a solution that might turn out to have some hooks in it that we have not thought about.”

— Laurie Stewart, Sound Community Bank

Whether reform is even warranted is something bankers also question.

“More regulation will not help,” said Bolton, adding that Silicon Valley and Signature banks failed because of poor risk management.

“If these two banks had been following good risk management practices that already exist under current rules and regulations, then these banks would still be with us today. We don’t need an overreaction from this situation, which is just what we got with the passage of Dodd-Frank,” Bolton said.

“If there is going to be a legislative solution, it needs to be targeted only at those large too-big-to-fail firms that pose systemic risk. It needs to be tiered and proportionate to risk,” he said. (Bolton is immediate past chairman of the Independent Community Bankers of America.)

Williamstown Bank’s Sharon Anderson worries that more regulation will hasten the pace of community banks merging with others in order to deal with the costs of compliance. “It’s an ongoing cost that we’re seeing,” she said. “It’s a trickle-down from larger institutions.”

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A Tune-up for Regulation and Deposit Insurance?

Bankers are also talking about the need for revisiting aspects of banking law and regulation not only in the light of the recent turmoil but also in acknowledgement of the many ways the financial services business has changed since the Dodd-Frank Act went into effect more than a decade ago.

For example, bank sizes are trending larger. Sorrentino said that when Dodd-Frank was passed, a $10 billion-asset bank was a large bank, and now it is a large community bank. And the rise of digital-only banks, neobanks, fintechs and more all occurred afterwards.

“We are not thinking correctly about the entire banking system,” said Sorrentino. “We’ve let the banking system become corrupted by nonbank financial firms that are not under the purview of the regulatory environment. It’s making everything more complicated and it’s drawing liquidity out of the system.”

A recent analysis by the Bank Policy Institute — “Why Is the Federal Reserve Abetting a Drain of Deposits from Banks?” — questions why the Federal Reserve continues to sell overnight debt in large quantities to money market funds through its reverse repurchase agreement system. BPI says this amounts to $2.2 trillion at a time when deposits are leaving banks.

Modernization of deposit insurance is also on the table, some aspects of which could be handled through regulatory change and other aspects of which would require legislation. Stewart, of Sound Community Bank, suggested at the ABA summit that risk-based deposit insurance premiums would likely be part of such a modernization.

“But I don’t think any of us in this room or at FDIC will have an answer tomorrow,” she said. The FDIC plans to have its paper on the subject ready by May 1, which is ambitious as it is.

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