Menendez asks witnesses about the details of proposed Deposit Insurance Reform
The Senator also questioned witnesses about the impact of reforming deposit insurance on smaller banks
WASHINGTON, D.C. – U.S. Senator Bob Menendez (D-N.J.), a senior member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Thursday participated in a hearing entitled, Perspectives on Deposit Insurance Reform after Recent Bank Failures.
During the hearing, the Senator asked Emily DeVito, Sr. Program Manager for Corporate Power at the Roosevelt Institute, about how increased coverage should be tailored if Congress were to take the FDIC’s approach to expand insurance limits for certain types of accounts, and asked what type of accounts should be included.
“The goal of such an approach is to provide stability by fully securing the deposits that businesses rely on to function without significantly increasing moral hazard,” Menendez said. “However, if we don’t carefully define the types of accounts that need increased coverage, we could see costs to the Deposit Insurance Fund increase without commensurate stability benefits.”
The Senator also inquired about ways to ensure that a targeted coverage increase is properly tailored, and whether the FDIC would need additional flexibility in order to implement this tailoring. Sen. Menendez also asked about the potential impact of increasing deposit insurance on smaller banks.
“Now, I’m curious and potentially worried about the effect increasing deposit insurance could have on smaller banks,” Menendez said. “For example, under the current deposit insurance framework, businesses and individuals with more than two hundred and fifty thousand dollars in deposits are encouraged to diversify their deposits across multiple banks to maximize coverage.”
The Senator went on to ask about the possibility of deposits becoming concentrated at a smaller number of banks if Congress were to increase deposit insurance. Sen. Menendez pressed Thomas Fraser, CEO of First Mutual Holding Co., about the impact these proposals would have on smaller banks.
“While increasing deposit insurance may be necessary in order to preserve financial stability, encouraging consolidation carries its own risks. Research from the Federal Reserve indicates that banking deserts are increasingly prevalent, particularly since the pandemic,” Menendez said. “I think we need to be mindful of actions that could further decrease diversity in the banking sector, leading to further closures and consolidations that leave families without access to banking services and further concentrate risk into large institutions.”
Following the collapse of several regional banks earlier this year, Sen. Menendez has been working to actively hold banks accountable for behaviors that could jeopardize the stability of the banking system. Last month, Sen. Menendez voted to advance bipartisan legislation out of the Banking Committee to hold accountable bank executives who drove their banks to the ground. The RECOUP Act would strengthen the banking agencies’ ability to remove senior executives who did not appropriately oversee and manage the risks and governance of their banks. It would also require banks to include governance and accountability standards in their bylaws, and would provide the FDIC with the authority to clawback certain compensation from senior executives at failed banks, including profits made by selling the bank’s stock.
In May, during a Senate Banking hearing, Sen. Menendez pressed federal financial regulators on their efforts to ensure greater executive accountability and effective supervision in the wake of recent bank failures. The Senator noted that Michael Barr, the Federal Reserve Vice Chair for Supervision, identified in his recent report major weaknesses in Silicon Valley Bank’s incentive compensation program, noting that it encouraged excessive risk taking to maximize short-term financial metrics and did not adequately reflect longer-term performance, nonfinancial risks, or unaddressed audit or supervisory issues.
In late March, Sen. Menendez led a bipartisan group of Senate Banking colleagues in pressing Federal Reserve Chair Jerome Powell on the agency’s use of enhanced supervision and prudential standards for SVB. He also signed a letter led by Chairman Sherrod Brown to Securities and Exchange Commission (SEC) Chair Gensler requesting prompt examinations of Silicon Valley Bank’s purportedly selling millions of dollars’ worth of company stock in the days and months leading up to SVB’s failure.
In response to the recent bank failures, Sen. Menendez also joined dozens of Senate and House colleagues to introduce the Secure Viable Banking Act, legislation that would repeal Title IV of S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, and increase prudential standards for banks similar to Silicon Valley Bank and Signature Bank. Sen. Menendez is a longtime advocate for prudent financial regulation, and was outspoken about the dangers of passing S.2155 five years ago, which reduced critical oversight and capital requirements for large banks.
