WASHINGTON (Reuters) – Government officials have discussed increasing deposit insurance without congressional approval as they brainstorm different approaches to resolve the turmoil at banks, two sources familiar with the talks said on Tuesday.
The idea, potentially using the Treasury’s exchange stabilization fund, was floated by government officials in a series of conversations between the Federal Reserve, the Treasury Department and the Federal Deposit Insurance Corporation in the days after the Silicon Valley bank failure on March 10, according to a government source. One.
The source said the idea was not universally supported.
Another source familiar with the discussions said the idea was discussed but stressed that while a temporary solution was discussed without congressional approval, any permanent measure would require congressional approval. That source said they did not believe such action was necessary.
A third source said the administration “does not consider the move necessary because it has tools to support community banks.”
Bloomberg had previously reported on the talks.
In the immediate fallout from the SVB failure, banks also explored using an exchange stabilization fund to support a broader deposit guarantee, according to an industry lawyer, as the industry also explored what options could be available. One concern raised is that the fund, an emergency reserve recently tapped during the 2020 pandemic, had only $38 billion in funds available as of January 31.
Under current law, US regulators are supposed to go to Congress when they determine that a “liquidity event” requires an increase in the amount to be guaranteed by the government.
The limitation was put in place among many others on regulatory power in the aftermath of the 2008 financial crisis and subsequent bank bailouts.
Among the concerns raised about using the Treasury fund instead are the expected criticism from Congress and possible concerns about its legality, according to a government source.
“I think that’s a difficult argument,” said Sheila Beer, who chaired the FDIC through 2008. “You look at the language … it says the FDIC should offer guarantees in times of stress, but it requires approval under this streamlined process.” calamity. “I think it’s questionable.”
Spokespeople for the Federal Reserve and the FDIC declined to comment.
The Treasury Department declined to comment on any discussions, but a spokesperson said, “Because of recent decisive action, the situation has stabilized, deposit flows have improved and Americans can be confident in the safety of their deposits.”
White House spokesman Michael Kikukawa said the Biden administration will use the tools it has to support community banks, noting that deposits have stabilized at regional banks across the country and, in some cases, modestly reversed outflows, since the measures taken in early March.
On Tuesday, Deputy Treasury Secretary Wally Ademo said “decisive action” by the Treasury Department, the Federal Reserve Bank and the Federal Insurance Corporation to protect depositors and ensure liquidity had stabilized the banking system, but a review of bank failures was in order.
“Importantly… by the American Hispanic Chamber of Commerce,” Adeyimo said at an event hosted by him.
“We of course continue to monitor the current situation and consider steps that can be taken to further enhance America’s financial stability,” he said, without elaborating.
(Reporting by Pete Schroeder and Andrea Schalal) Editing by Megan Davies and Daniel Wallis
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