US mid-sized banks call upon FDIC for fair deposit insurance coverage to restore stability

A number of mid-sized regional banks and community banks in the United States are urging the Federal Deposit Insurance Corporation (FDIC) to extend 100 percent insurance coverage to all bank deposits following the liquidity crisis that caused the collapse of Silicon Valley Bank and Signature Bank.

Typically, the FDIC provides insurance coverage of up to $250,000 per depositor , and in the event of a bank failure any amount above this limit at risk. However, the collapse of Silicon Valley Bank and Signature Bank prompted the FDIC to take extraordinary measures to ensure that all depositors received their full deposits, regardless of whether their accounts were insured up to the $250,000 limit.

Mid size banks feel the heat

This move created a disadvantage for mid-sized and community banks, as many of their high net worth customers withdrew their deposits and transferred them to larger banks considered “too big to fail”. These depositors believed that they would receive their full deposits even if these large banks failed, due to the actions taken by the FDIC in the case of Silicon Valley Bank and Signature Bank.

A sign for Silicon Valley Bank (SVB) headquarters is seen in Santa Clara, California, U.S. March 10, 2023. REUTERS/Nathan Frandino/File Photo/File Photo

The Treasury Department has signaled that it will not provide support for uninsured deposits in banks that do not qualify for systemic risk exceptions, further exacerbating the situation for mid-sized banks. Since these banks are unlikely to be granted such exceptions, their depositors will only be insured for up to $250,000 in the event of a bank failure.

This announcement has sparked concern and fear among depositors, leading many to withdraw their funds in large amounts from mid-sized and community banks.

The banks are now calling on financial and banking regulators to adopt a fairer approach to the issue by providing a guarantee for all uninsured deposits, regardless of the bank, for the next two years. Such a move would enable mid-sized banks to reassure their customers that their deposits are secure at their institutions and would help restore stability to the banking system.

According to a letter written by The Mid-Size Bank Coalition of America to the Treasury Department, FDIC, comptroller of the currency, and Federal Reserve, implementing this guarantee would put an immediate stop to the withdrawal of funds from smaller banks, stabilize the banking sector, and significantly decrease the likelihood of additional bank failures.

Bloomberg News has reported that the Treasury Department is currently investigating whether federal regulators possess emergency authority to temporarily provide insurance coverage for deposits exceeding the FDIC’s current cap of $250,000, without requiring approval from Congress.