ABA: No easy answers for changing deposit insurance

The conversation around deposit insurance policy is a complex one with no easy answers, and any changes will have implications for the entire financial system, American Bankers Association SVP Alison Touhey said today. Touhey was one of four panelists who participated in a roundtable discussion on deposit insurance organized by House Financial Services Committee Ranking Member Maxine Waters (D-Calif.). The roundtable came more than a month after the FDIC released a report suggesting that a “targeted” expansion of deposit insurance could be the best method for injecting more stability into the financial system following the recent bank failures. Touhey noted that the failures came about because of circumstances specific to those banks.

“The failures of [Silicon Valley Bank], Signature and First Republic banks were largely idiosyncratic and the result of lapses in management that led to outsize and unreasonable concentrations in balance sheets that were significantly underprepared for rising interest rates,” Touhey said. “However, these failures raise important questions about whether FDIC insurance coverage has kept pace with changes to the banking marketplace and allows banks to compete for customers on an equitable footing.”

ABA has formed a working group to explore deposit insurance policy. Bankers have a wide range of opinions on the issue, from the appropriate amount of insurance or whether additional coverage is needed, Touhey said. What is clear is that the conversation around deposit insurance will be a complex one with no fast or easy answers, she added.

“Moreover, deposit insurance is just one aspect of financial stability, which also includes transparent and predictable resolutions, among other things,” Touhey said. “While the current framework is more than sufficient to handle systemic threats, it is becoming increasingly clear that every incident of stress is unique, and that the more flexibility the FDIC and other agencies have to make targeted decisions quickly, the better they can mitigate the impact of stress on the system.”

Waters acknowledged the complexity of the issue in her closing remarks. “If there is one thing I heard today, it is: Don’t do anything irrational and give it a lot of thought before you jump into an option that you don’t know what the consequences may be,” she said.