At Hearing, Ranking Member Warren Highlights Need for Deposit Insurance Reform to Protect Small Businesses

At Hearing, Ranking Member Warren Highlights Need for Deposit Insurance Reform to Protect Small Businesses

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Washington, D.C. - Today, U.S. Senator Elizabeth Warren (D-Mass.), Ranking Member of the Senate Banking, Housing, and Urban Affairs Committee, gave opening remarks and questioned Bob Harrison, the Chairman, President, and CEO of First Hawaiian Bank, and Peter Rice, the President & CEO of Hanscom Federal Credit Union, at the Committee's hearing on "Evaluating Perspectives on Deposit Insurance Reform."

At the hearing, Ranking Member Warren outlined principles that should guide legislation on deposit insurance reform. She also questioned Mr. Harrison and Mr. Rice on the impact of the 2023 big bank failures on deposits in small and mid-sized institutions and on their ability to lend to small businesses. Several Republican members of the Committee echoed similar sentiments, showing strong bipartisan support for deposit insurance reform.

Below is the transcript of Ranking Member Warren's opening remarks and questioning:

Opening Remarks

Ranking Member Warren: During the Great Depression, millions of Americans lost their life savings as thousands of banks failed. And our country learned the hard way that it is critical for the health of the economy for people to have a completely safe place to store their money. I grew up in Oklahoma decades after the Great Depression, but I grew up in the shadow of always hearing the stories about who had lost money, who had been wiped out and what it meant to show up at your bank and the money that had been carefully saved had just disappeared. In 1933, Congress created the federal deposit insurance framework. And as the Chairman said, depositors have not lost a penny of their insured deposits in the 92 years since then. FDIC and NCUA insurance is currently limited to $250,000. Above that, if a bank or credit union fails, customers with bigger deposits may have to wait in line and hope that they will be able to recover some portion of their funds.

Now, small and mid-sized businesses need a safe place to store money for payroll, operating expenses, and everyday payments. But they often maintain balances above $250,000 in their transaction accounts. Several recent bank failures have made clear that the deposit insurance framework could be strengthened to better serve small businesses and to level the playing field between banks on Wall Street and smaller banks that serve Main Street.

Take a look at what happened in March of 2023. Silicon Valley Bank and Signature Bank blew up, creating the third- and fourth-largest bank failures in American history. In order to protect from additional bank runs and stop a full-blown financial crisis, the Fed, FDIC, and Treasury took the extraordinary step of guaranteeing all-all-uninsured deposits at those banks. The government backstopped literally billions of dollars in deposits for massive corporations, like the venture capital firm Sequoia, crypto company Circle, and electronics company Roku. And those companies did not lose a penny.

Compare that with two small bank failures in Oklahoma and Texas in the years after SVB crashed and the story turns out to be very different. Local small businesses, like pharmacies and grocery stores and construction companies that kept cash at those community banks, got $250,000 in FDIC coverage and collectively lost millions of dollars on the uninsured balance.

I don't think we want or expect small businesses to comb through community bank call reports every quarter to see if it's safe to keep your transaction account there. I don't think they should be required to make an investigation to see if there might be executive fraud at the bank when deciding where to have a checking account. The last thing a small-town dentist or landscaping company or a bakery should have to worry about is losing money because their local bank failed.

People understand which banks will-and won't-get bailed out if there's trouble. In the week following SVB's crash, $100 billion in deposits left the little banks, while the largest 25 banks saw $120 billion in new deposits. Drawing deposits out of smaller banks diverts funds away from local lending to families and small businesses and pushes it toward Wall Street speculation. And the small businesses without access to a megabank, especially in rural communities, have no choice but to suffer the consequences if their local bank or credit union fails.

Now, I've long pushed for leveling the playing field by increasing deposit insurance limits for business transaction accounts. Covering these accounts would reduce the likelihood of runs, help smaller financial institutions compete, and ensure small businesses have a completely safe place to store their cash. If small and mid-sized businesses are protected, this could also limit the government's impulse to backstop giant depositors when a crisis occurs.

As the Committee considers this legislation, there are a couple of principles I hope we will stick with:

First, the deposit insurance limit for banks and credit unions should be raised to a level that covers the cash needs of small and medium-sized businesses - businesses that do not have the capacity to execute sophisticated cash management strategies deployed by massive corporations.

Second, the increased limit should apply to transaction accounts - accounts that are used to make and receive payments. The accounts should not pay interest or other monetary rewards.

And finally, the policy should be simple. Complex rulemaking, opt-in and opt-out features, and convoluted definitions would create unnecessary compliance costs, customer confusion, and invite regulatory arbitrage. A clear and simple framework will be easier for the FDIC and NCUA to administer, easier for small businesses to understand, and easier for banks to implement.

This is a common sense policy with broad bipartisan support. It's good for small banks and credit unions. It's good for small businesses. And it's good for our economy.

Transcript of Ranking Member Warren's questioning:

Ranking Member Warren: Thank you. I actually want to pick up right where Mr. Kelly is about picking winners and losers.

We absolutely pick winners and losers right now. Because the winners and losers game is if things get rough in the banking industry and it's starting to look scary, get out of the small banks because the federal government will only step in behind the big banks. That's not just a tale. That is literally what is happening. And we've watched it happen. Nobody bails out the little guys. They only bail out the giants.

And that's not just a problem for banks. That's a problem for how we finance small business in America. Big banks, I get it, they have their role to play. Their role to play is not how to help the local drugstore, is not understanding this local manufacturing business that's trying to get itself started and you understand the bumps, and when the money is going to be there and when the money's not and you try and work with them and put them on a payment schedule that works.

It is the small banks and medium-sized banks that do the handcrafting that that kind of work demands. So this policy is not about trying to pick winners and losers. It's about trying to level the playing field again so that depositors understand the bank I work with year after year after year is a place I can safely keep my money even in troubled times.

So let me start there. Mr. Harrison and Mr. Rice, you both lead smaller financial institutions. You play important roles in your community. What happened to deposits at small and mid-sized institutions, like yours, when SVB failed? And does deposit migration affect your ability to lend to the businesses you want to be able to support?

Why don't we start with you, Mr. Harrison, and then I'll come to you, Mr. Rice?

Bob Harrison: Thank you, Senator Warren. You know, right after that, there was an intense amount of uncertainty. We called hundreds and hundreds of our clients. All of my peers did the same thing in the mid-sized banks.

We were fortunate. We didn't have a lot of money leave our bank, but honestly right afterwards we proactively did some federal home loan bank draws just to make sure that we had liquidity. Because that liquidity, that certainty of liquidity that's in those operating accounts is what we used to make loans. That's what we used to put back into the communities. And if you're not certain it's going to be there, you have to make sure it's there. That's much more expensive to go out and get that kind of funding. But we did that. Many of my peers lost significant amounts of deposits in the week after that happened.

Sen. Warren: So SBV fails and you end up spending a lot of money?

Harrison: We wanted to make sure we were safe.

Sen. Warren: Yeah, I appreciate that you do, but that isn't free. Mr. Rice?

Peter Rice: Thank you, Senator. Thankfully, credit unions were untouched during this crisis. It was seen as a banking crisis. But it's not lost upon us that fear doesn't understand a distinction between banks and credit unions. It's the system. So on this occasion, we were lucky.

But much like Mr. Harrison has pointed out that big banks lend out 50 - 55% of the deposits, credit unions lend out 90 - 100% of deposits. So $550 billion is taken out of the small bank and credit union system, that's a lot of loans to local communities that are at risk.

Sen. Warren: So you really have the potential here to contract the economy. One failure over here causes contraction in lending.

Rice: Rapidly.

Sen. Warren: Rapidly throughout the system. So tell me about the right number. You two lend the money out.

Obviously, I think what you're telling us, what your customers are telling us when they flee, is $250,000 is just not a high enough number, that these transaction accounts that involve payroll and all or above it. Can you just give us an idea of what you think is the right insurance number, Mr. Harrison?

Harrison: Well, I looked at our customer base and talked to some of our peers. And really in the different buckets, there's contractors - small, medium and large. There's hospitals. There's small manufacturers. We just don't want the customer to have to decide.

We think that $20 million number covers the vast majority of our operating accounts, so we're very comfortable with that as a group, as our 100 banks in the mid-sized banks. So that's the number we're comfortable with, but $250,000 just does not seem to be enough.

Sen. Warren: Mr. Rice, how do you feel about that number?

Rice: You heard my testimony, Senator, that Ripling had $545 million in their payroll account. And $250,000 obviously didn't come anywhere near to covering it. We also support at least $20 million. But it should be important, I don't agree with the term "small business" because to them it's the biggest thing in their life and to call it small is kind of, it's interesting, it's a little demeaning, to be honest.

And small businesses range up to 500 people in employment. And that's from the SBA - that's our own governmental definition. So it can be above $20 million, but we do support $20 million. But we do think you need to look at payrolls and payroll account companies and think of a way to include them in it without necessarily including insurance nonpremiums.

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