On Thursday, Treasury Secretary Janet Yellen testified before the Senate Finance Committee and conceded that the Federal Deposit Insurance Corporation and the Federal Reserve may not guarantee big deposits at small community banks.
Until its failure last week, Silicon Valley Bank served as a banking institution for roughly half of the venture-backed technology and healthcare enterprises in the United States, and the bulk of its deposits were over the $250,000 FDIC insurance limit. As about half of all deposits in the banking system are over $250,000, regulators rushed to guarantee Silicon Valley Bank’s entire deposit pool to prevent a bank run.
Republican Oklahoma Senator James Lankford pressed Yellen on whether or not deposits at all community banks in his state, regardless of size, would be completely guaranteed. In response, Yellen stated that a bank “only gets that treatment” if “the failure to protect uninsured depositors would create systemic risk and significant financial and economic consequences” and a supermajority of the FDIC and Federal Reserve boards, as well as herself and President Joe Biden, reach that conclusion.
Locally owned and operated, or “community,” banks tend to serve the commercial and residential customers in a very narrow radius around their branch.
Lankford pointed out that large account holders have already been pushed to relocate their cash into large financial institutions due to this deposit insurance strategy.
It’s been a decade of bank mergers, the legislator remarked. “I am worried you are about to hasten this by advising people with substantial deposits at local banks that “we are not going to make you whole, but if you switch to one of our recommended institutions, we will make you whole.”
The phenomenon is “happening right now,” Lankford said in response to Yellen’s claim that her agency and other financial regulators are not trying to drive large depositors away from small banks. “You are fully insured, no matter what the amount is, if you are in a big bank,” he said. “You are not fully insured if you are in a community bank.”
Yellen began her testimony, which had been slated to focus on the White House’s budget proposal from last week, by assuring Congress that all deposits at Silicon Valley Bank and Signature Bank had been successfully preserved by the Treasury Department, the Federal Reserve, and the FDIC. The Deposit Insurance Fund, which is supported by levies on banks, stepped in to protect the assets of account holders at both failed banking institutions.
Lankford was concerned that Oklahoma’s local banks would be hit with a special levy to cover the deposits of the “huge number of Chinese investors” and “businesses directly related to the Chinese Communist Party” that had accounts at Silicon Valley Bank. As there is no “legal basis to discriminate among uninsured depositors,” Yellen stated emphatically that all uninsured investors, including international depositors, “would be made whole in that bank.”
In a letter to Yellen, Republican Florida Senator Marco Rubio voiced similar worries about Silicon Valley Bank’s partnership with Shanghai Pudon Development Bank to support Chinese businesses. The congressman wanted to know if Chinese depositors “may expect to receive government refunds from the Deposit Insurance Fund and other federal aid.”