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Insights
Thought Leadership
Momentum Around Deposit Insurance Reform Dissipates in Congress
July 25, 2023
The Senate Banking Committee met last week to discuss deposit insurance reform in the wake of the bank failures earlier this year, and the results were underwhelming. Despite repeated calls from the banking sector for increases to deposit insurance limits, either across the board or for specific categories of depositors, lawmakers seem to have little appetite for change.
Committee Chair Sherrod Brown, D-Ohio, was clear that he is not convinced “what changes, if any, should be made”, and Senator Mark Warner, D-Va., summed up the hearings with, “It feels to me like a lot of the energy around the FDIC in terms of reform has kind of dissipated a little bit.”
The change in momentum is disappointing for many in the industry, given how much urgency the topic had earlier this year and given how helpful reform would be for smaller banks across the country. Small and midsize banks have seen large amounts of uninsured deposit outflows as large-value depositors worried about the security of their funds have left for larger institutions and money markets.
The ability to offer higher insurance would help smaller banks attract and retain large depositors and help them grow in an increasingly competitive banking landscape, while also reducing run risk in the sector. The lack of action from Congress, despite repeated calls for help, will force banks to take their destiny and their fate into their own hands.
We’ve been vocal that we believe reciprocal and sweep products, which provide extended insurance to depositors by allocating deposits into a network of receiving banks, provide a beautiful solution. Banks can make their depositors eligible for extended insurance, without losing deposits in aggregate and without losing their customer relationships. Reciprocal products have become essential to banks’ operating model, and we, as many of you know, are hard at work making sure the products are enjoyable for both banks and their depositors.
Best,
Paolo and the ModernFi Team
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Sources: FHLB Advances are an average of FHLB Boston, FHLB Chicago, and FHLB Des Moines. Brokered CDs are an average of Fidelity and Vanguard. Listed CDs provided by National CD Rateline. US Treasurys provided by WSJ. SOFR provided by CME.
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