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Small Banks Call for Deposit Insurance Clarity

Janet Yellen says smaller institutions will be helped if they are deemed to present a contagion risk

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  • Written by  Banking Exchange staff
Small Banks Call for Deposit Insurance Clarity

Banking organizations are calling for policy clarity on deposit insurance in the wake of the federally-backed rescues of two large banks earlier this month.

In the wake of the collapses of Silicon Valley Bank (SVB) and Signature Bank, some commentators have suggested that federal authorities should temporarily extend insurance to all deposits, not just the $250,000 cap currently in place under the Federal Deposit Insurance Corporation’s rules.

Independent Community Bankers of America (ICBA) president and CEO Rebeca Romero Rainey last week hit out at the suggestion by Treasury Secretary Janet Yellen that only uninsured deposits at “systemically risky” banks would be protected, describing the proposal as “reward[ing] mismanagement and risky behavior”.

However, speaking at an event hosted by the American Bankers Association (ABA) this week, Yellen clarified her remarks by saying that “similar actions [to the SVB rescue] could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion”.

Associated Press reported that, when asked by ABA president Rob Nichols for information about potential policy changes, Yellen said she was “focused on… stabilizing our system”.

In response, ICBA’s Rainey welcomed the clarification and pledged to “continue working with Treasury Secretary Yellen and other policymakers to ensure Washington’s response to recent closures at large, risky banks does not affect the community banks that continue to do right by their customers, does not reward risky behavior at large financial institutions, and ensures the long-term viability of a strong dual banking system”.

Meanwhile, representatives of the National Bankers Association met with US House Financial Services and Senate Banking Committees on Tuesday to push for expanded protections for minority and community banks.

“The closures of both SVB and Signature Bank have led to deposit flights and eroding public trust in the financial institutions that have historically served communities of color and small businesses,” said Nicole Elam, president and CEO of the National Bankers Association.

“Deposits moving into banks that are seen as too big to fail threaten the survivability of minority and community banks. To combat this, we are calling for deposit insurance safeguards and increased protection of deposits.”

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