Barbara A. Rehm’s recent column on extending the law that provides unlimited deposit insurance on non-interest bearing demand deposits is on target. She is right to say it would be very dangerous politically for the industry to seek an extension.
While one can debate the merits in a vacuum and while one can easily understand why some banks would want an extension, there are two real world considerations. First, the legislation has absolutely no chance of being enacted. Second, these deposits will not last anyway; interest rates at some point in the near future will go up, and the requirement that these accounts be non-interesting bearing means that the money will run, hard and fast.
I have been involved in banking legislation for almost 40 years, and it is very clear to me, and everyone else who understands Washington, that no bill – none – that makes more than a technical change in Dodd-Frank has any chance to pass this year. And that applies even to non-controversial bills.
An extension bill would be controversial indeed, with large portions of the banking industry, as well as others, such as the money market mutual funds, in opposition.
Bankers I talk to have, not surprisingly, expressed concern that the cost could be $15 to $23 billion in additional premiums. Many Members of Congress would philosophically oppose anything they think expands the safety net for financial firms. And, as Rehm notes, such legislation would be a dead certain vehicle for negative amendments, for example from Senator Richard Durbin, credit unions, and anyone who thinks the industry may need another regulation.
In addition, while the FDIC has not taken a public position yet, it is hard to believe it would not oppose the extension, if only behind the scenes. One of the strongest concerns the FDIC has had since the 1980s is over the use of non-core deposits by banks. Recently the FDIC reiterated its strong concerns in this area in a lengthy report on brokered deposits. I am one of those who think it is the wrong approach to judge deposits by their source rather than their characteristics. But in its report, the FDIC made it quite clear what it does not like: deposits that are not "sticky" – i.e., those that will run quickly under certain circumstances.
In the FDIC’s view, these deposits should not support long-term lending, as they are really short term. Non-sticky deposits also drive up the cost of bank failures and lower the price paid for troubled banks, as purchasers don’t want to pay for temporary deposits, according to the regulator.
After reading the FDIC’s brokered deposit study, one would have to conclude the agency will not look favorably on a bank holding a large amount of deposits that must be non-interest bearing to qualify for the unlimited insurance when it is only a question of time as to when interest rates will go up and many of these deposits will run.
Pushing for the extension is not just a waste of the industry’s valuable and limited political resources. As Rehm points out, it is dangerous politically and from a public relations perspective to tilt at this windmill. Such an effort sends a signal that just maybe the industry is not fully healthy and still needs support. Our industry should do everything it can to put the financial crisis in the rear view mirror.
As Kelly King, the chief executive of BB&T Corp., said in the FDIC community bank symposium about this issue: "As an industry we are already dangerously close to being viewed as a utility."
So we have a proposal that has absolutely no chance to pass, that will have strong opposition from many banks of all sizes, that will be a vehicle for bad amendments, that is estimated to cost the industry $15 to $23 billion, that will raise renewed concerns about whether the industry is really healthy, that moves the industry further down the line to a utility, that will have strong opposition from within the industry and from others, and that the FDIC almost certainly cannot support.
To say the least, it would seem the banking industry should spend its political capital more wisely.
Edward L. Yingling is a partner in the Washington office of the law firm Covington & Burling LLP. He is a former president and CEO of the American Bankers Association.