Former FDIC Chairman McWilliams warns against unlimited deposit insurance

Former Federal Deposit Insurance Corp. Chairwoman Jelena McWilliams said Wednesday that calls for deposit insurance levels to be raised above $250,000 would come with accompanying costs that regulators and lawmakers should consider along with any perceived benefits.

Bloomberg News

Former Federal Deposit Insurance Corp. Chairwoman Jelena McWilliams warned against removing the cap on insured deposits after two banks collapsed this month.

McWilliams said during a panel hosted by the Consumer Bankers Association on Wednesday that raising the cap above the current $250,000 limit would create significant costs that policymakers would need to consider.

“There’s the moral hazard cost, there’s the market discipline cost, and then there’s the actual dollar cost to banks,” she said, noting that the latter wouldn’t occur without some kind of headwind. “One of the most [common] Objections I’ve received on anything have been the deposit ratings at the banks and the amount we have been charging them.

To avoid contagion following the collapse of Santa Clara, California-based Silicon Valley Bank and New York-based Signature Bank, federal regulators announced they would cover all deposits at the banks, even those exceeding the ceiling of far exceed $250,000. In the weeks since, government officials have sent mixed signals about whether uninsured deposits elsewhere in the banking system would be held up. The ordeal has reignited debate over what the appropriate limit for federal deposit insurance should be.

McWilliams led the FDIC from June 2018 to February 2022. Since leaving office, she has joined the law firm of Cravath, Swaine & Moore, where she heads the financial institutions group practice.

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During the event, she declined to comment on the oversight of the two banks, which were taken over by the FDIC within two days. Nor did she have any concrete policy recommendations on how to prevent the problems at hand from leading to similar failures in the future.

Instead, McWilliams urged politicians and regulators to take the time to fully understand the facts of what is happening, rather than change policy based on preconceived notions.

“Beware of fast-moving legislative vehicles,” she said. “We will probably have some laws. I don’t know how far, how much or what, but I think people will be a bit knee-jerk and I really hope cooler heads prevail.”

Aaron Klein, a senior Brookings Institution official and former Treasury Department official who also spoke on the panel, urged lawmakers not to use the bankruns — which were sparked by coordinated withdrawals by large, uninsured depositors at Silicon Valley Bank — as a justification to be used to raise or remove the insurance ceiling.

Klein, who implemented the Troubled Asset Relief Program (TARP) after the subprime mortgage crisis in 2007 and 2008, said current levels are already generous. Raising the limit to millions, as some have suggested, would go against the insurance program’s original intent, he said, which was to protect ordinary depositors.

“I was part of the legislation that raised it from $100,000 to $250,000, which was TARP,” Klein said. “Many of you may not know or remember [but] this was given to many people in this room as candy to help them put pressure on their local congressman who voted against TARP in the House of Representatives.”

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McWilliams said the most striking element of Silicon Valley Bank’s failure was the speed with which it happened.

“When you think about a bank run, don’t think you can lose $42 billion in deposits in a matter of hours,” she said.

During a hearing before the Senate Banking Committee on Tuesday, Fed Vice Chairman for Oversight Michael Barr noted that the bank would open Friday, 10 a.m. this morning instead of following convention and waiting until close of business.

McWilliams said regulators have detailed information about prudential deficiencies at individual banks. While she said the FDIC’s internal mechanisms for organizing this data at the bank level could be improved — she suggested creating an internal data terminal with the latest call report data from the banks it regulates — serious problems don’t appear out of nowhere.

“As a regulator, you know who the outliers among banks are, at a pretty granular level,” she said. “The question is, do you act on it? And at what point do you act on it?”

McWilliams and Klein both expressed skepticism about the role social media played in the sinking of the two banks, despite the Fed’s suggestion that speculation on Twitter was causing panic among depositors.

“These are sophisticated corporate treasurers of companies that have $100 million, billion dollar valuations that are withdrawing their money. Do you think they’re withdrawing their money because Jim Joe had a tweet?” Klein said. “The Federal Reserve, in their statement [to Congress]mentioned social media twice and regulation of bank holding companies zero.”

McWilliams noted that some venture capitalists who are keeping their funds in the bank used social media and email to try to allay their fellow investors’ concerns, so she doesn’t see social media as a contributing factor to failure. Ultimately, she said, the problem was a “general panic” about the bank’s health that turned into a “self-fulfilling prophecy” about its failure.

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“I don’t know if I would call it a Twitter run,” she said. “Twitter was a vehicle, but for Aaron it might have made things worse at the bank, but I wouldn’t say Twitter caused the failure of Silicon Valley Bank.”