GOP senators punch big banks during deposit insurance panel

• Key insight: Republican lawmakers concluded that large banks will fight back against a bipartisan proposal that's aimed at helping medium-size and small banks, since there's a widespread assumption that large banks already have an implicit guarantee for uninsured deposits.
• Forward look: Sen. Bill Hagerty, R-Tenn., will look to introduce the deposit insurance bill, along with his cosponsor, Sen. Angela Alsobrooks, D-Md., as standalone legislation "soon."
• What's at stake: Some small banks have said that the proposal would increase the amount they pay in assessments to the FDIC. 

WASHINGTON — Big banks took a beating from Republicans and Democrats alike at a Senate Banking Committee hearing, where lawmakers concluded that the absence of the largest institutions was a sign that they oppose a bipartisan proposal for deposit insurance reform. 

"Just in case someone's wondering, we did invite the big banks to be here today," the panel's Chairman Tim Scott, R-S.C. said at Wednesday's hearing.

"Where are they?" Sen. Elizabeth Warren, D-Mass., the committee's ranking member, quipped. 

"I don't see them," Scott said. 

An amendment from Sens. Bill Hagerty, R-Tenn., and Angela Alsobrooks, D-Md., would balloon the amount of insured deposits held at banks by raising the limit for business accounts to $20 million, up from the current $250,000 limit for all kinds of accounts.

The hearing showed new momentum for the idea of deposit insurance reform, an effort that bloomed shortly after the Silicon Valley Bank crisis in 2023, but that fizzled afterwards. Since then, a rash of small banks have failed and  depositors in Red states like Oklahoma have had to take a haircut on their uninsured deposits. The contrast between the treatment of those depositors and the better outcomes for large tech companies that banked with SVB has revived the momentum for changes among Republican lawmakers.

While the bill was originally proposed as an amendment to must-pass spending legislation, Hagerty said during the hearing that he and Alsobrooks will reintroduce it as standalone legislation. 

Big banks aren't the only lenders that have concerns.

The hearing offered a crucial opportunity for small banks in particular to articulate their concerns, and to offer suggestions for how lawmakers could offset any cost from the increase in insurable deposits for the smallest banks. Several Republican lawmakers were wavering on the proposal ahead of the hearing because of potential harm to small businesses and banks.

But the witnesses at Wednesday's hearing offered no ways for lawmakers to reduce the burden on small banks, and they declined to say that smaller banks would even be harmed at all by the proposal.

Concerns about the $20 million number, which some community bankers have complained is too high, weren't addressed — even when witnesses, including American Bankers Association Chair-elect Kenneth Kelly, whose group represents small banks as well as larger ones, were asked to give specific policy ideas, or to suggest a different coverage limit.

"I don't have a number, our recommendation is that it needs to be studied and empirically based," said Kelly, who's also the CEO of Detroit-based First Independence Bank, which has around $700 million of assets.

"Come on guys, I know it oughta be empirically based," said Sen. John Kennedy, R-La. Speaking to Nicholas Podsiadly, a partner at the law firm Jones Day who was brought in as an expert witness in part due to his former role as general counsel at the Federal Deposit Insurance Corp., Kennedy said: "You used to work at FDIC, give me a number." 

Only Bob Harrison, CEO of the $23.8 billion-asset First Hawaiian Bank, who favors the proposed deposit insurance change, gave a straight answer, saying that small banks might be against the bill.

"I think there's some smaller banks who feel they don't need it because their deposit accounts aren't that large, and they would not be as willing to do that," Harrison said. "I think some of the banks that currently have coverage for free are likely to fight back."

Harrison represents the subsector of banks that's pushing hard for the bill. He's a board member of the Mid-Size Bank Coalition, which represents regional banks, including those in the asset range of Silicon Valley Bank. Those banks say that depositors fled banks like theirs in the wake of the SVB crisis to 'too big to fail' institutions. 

What key Republican voices heard was that large banks would be against the bill because it gives smaller banks the explicit guarantee that they say large banks already have implicitly.

"So here's what I hear you saying: With $20 million indexed to inflation, that the large banks are not going to like it because they get an implicit guarantee. Does anyone disagree with that?" Kennedy said. "I don't disagree with Senator Warren's assessment that the big banks don't have to worry about it because they don't need bailing out."

Hagerty, for his part, spent much of his time arguing that his bill wouldn't raise deposit insurance premiums.

"There seems to be a concern that in doing this expansion, somehow we're going to raise assessments on the very banks that we're trying to help," Hagerty said, while denying that's the case. 

He said that the Deposit Insurance Fund is currently above its minimum ratio, and that the bill wouldn't necessarily impose any special assessments.

"To be clear, assessments are statutorily triggered when the Deposit Insurance Fund's reserve ratio drops below its mandated minimum," Hagerty said. "To be clear to my colleagues, the DIF is currently over budget, and just to be clear, the reserve ratio is adequate. It's exceeded its required mandatory level, and it's actually trending upward."