Deposit insurance bill faces pushback over price tag

Key insight: Some Republicans are starting to question the cost of deposit insurance reform for business accounts. 
Expert quote: "The $20 million number just feels like a bludgeon," said Christpher Williston, president and CEO of the Independent Bankers Association of Texas.
Forward look: The bill isn't likely to be attached to must-pass defense spending legislation, but lawmakers will work to pass it on its own. 

WASHINGTON — As lawmakers on the Senate Banking Committee consider deposit insurance reform later this morning, the most promising bipartisan bill under consideration is losing steam. 

Sens. Bill Hagerty, R-Tenn., and Angela Alsobrooks, D-Md., earlier this year introduced an amendment to a must-pass defense spending package that would have increased deposit insurance limits to $20 million for designated business accounts at all but the largest banks. As recently as a few weeks ago, it looked like that proposal might make its way into that package. 

But the bill's prospects have since dimmed, according to  three people familiar with the issue. Many lawmakers, including key voices on the Senate Banking Committee and leading Republicans on the House Financial Services Committee, are privately wondering whether the inevitably high cost of insuring a much larger pool of deposits would stymie banks' ability to offer credit in the future, the people said. 

Dan Savickas, vice president of policy and government affairs at Taxpayers Protection Alliance, a conservative-leaning group that advocates for lower government spending, said concerns about the costs of raising deposit insurance are well-founded.

"If you're increasing the amount the FDIC is insuring by 100-fold, to make good on that they need to have the funds to pay out if a bank fails," Savickas said. 

Savickas estimates that it would cost banks $30 billion in additional premiums to raise the deposit insurance fund  — the pot of money that the Federal Deposit Insurance Corp. maintains to resolve failed banks — to the level it would need to be if those additional deposits were insured.

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"That probably means special assessments for the banks over the long run," he said. 

Much of the opposition to the proposal is coalescing around how high deposit insurance is raised under the proposal, which some think is too high. 

"To me, the $20 million number just feels like a bludgeon," said Christpher Williston, president and CEO of the Independent Bankers Association of Texas. "There's all this talk about what, you know, what happened during Silicon Valley Bank failure and the other bank failures a few years ago, and our banks retained large depositors on the value of relationship and trust. The deposit flight we saw during that time period was much more driven by some of the high interest offerings of the brokerage houses and others." 

Still, some bankers do like the proposal, and most want to see some form of deposit insurance reform pass. Depositors in small banks sometimes take haircuts on their uninsured deposits when banks fail — as happened when the First National Bank of Lindsay failed well after the Silicon Valley Bank crisis. Raising deposit insurance for those accounts would ease small bank depositors' concerns, he said. 

"I'm glad we're talking about it, and I think it's an important proposal [because] we need to talk about deposit insurance reform," Williston said. "It's an appropriate discussion."

The proposal is mostly championed by midsized institutions, particularly large regional banks who lost deposits to the largest banks during the 2023 banking crisis when  some depositors got nervous about banking with anyone but a too-big-to-fail institution. They say that a higher business account limit would help them retain depositors in times of uncertainty, and prevent deposit outflow to the largest banks. 

The bill's biggest opponents in the banking industry are banks with more than $250 billion of assets, who do not get the benefit of higher deposit insurance under the Hagerty/Alsobrooks legislation, and smaller banks who balk at the inevitable increase in premiums. 

The fact that the bill is getting a hearing is both a sign that it's unlikely to be attached to the defense spending bill and that key players like Senate Banking Committee Chairman Tim Scott, R-S.C., who sets the committee schedule, want to give the issue some consideration. But if it passes, it will likely have to be outside of the reconciliation process, which means Republicans will need some Democratic buy-in to get to the requisite votes. 

"I think it's going to have to go it alone for now, and it's going to take a while and faces an uphill climb," said Ian Katz, managing director at Capital Alpha Partners. 

The bill already has some early Democratic support with Alsobrooks, suggesting that the cosponsors could find more and gives its sponsors room to consider further amendments and negotiated trade-offs. 

"I don't think the Hagerty-Alsobrooks bill is the final word, but I also don't think this bill is going away," Savickas said.