Banker: Deposit insurance reform should focus on consumer protection, confidence

Deposit insurance reform should remain centered on consumer protection and building confidence in the stability of the banking system, Thomas Fraser, CEO of First Mutual Holding Co. in Lakewood, Ohio, told the Senate Banking Committee Thursday. Fraser was one of three witnesses who testified before the committee during a hearing on deposit insurance reform following the recent bank failures. In his remarks, the CEO said that while proposals have been offered on moral hazard and who should bear the cost of bank failures, consumer protection and confidence should be “our highest objectives” when reforming the system.

“It has become evident to me that a structural shift in banking is occurring and there’s a range of new emergent risks that did not exist in the ‘08 financial crisis and certainly didn’t exist in 1934… They’re challenging the perimeter of traditional perceptions and mechanics about how our financial system works,” Fraser said. “It’s imperative that banking policy adapts to these new risks, especially with respect to deposit insurance reforms.”

Among the risks Fraser identified were mobile technology and artificial intelligence tools that make deposit bases more vulnerable; competition with nonbank money market funds that offer high rates without FDIC guarantees; and an increasing number of shadow banks and fintechs offering bank-like services. At the same time, he said that any reform options should also account for the unintended consequences of making policy changes. Fraser also said that should a bank wind up in FDIC receivership, the resolution should consider long-term competitive concentrations beyond just expedited, low-cost resolutions.