In the News

Washington quietly prepares a bank rescue — just in case

Politico
3/27/2020

Tucked inside Congress' $2 trillion economic rescue package for America is sweeping authority for the government to come to the aid of the one industry that has insisted it doesn't need a bailout: the big banks.

Lenders that the government saved in the 2008 financial crisis have been touting the strength of their balance sheets heading into the coronavirus pandemic. But Congress is backstopping them anyway with a provision in the bill that would give the Federal Deposit Insurance Corp. power to guarantee checking accounts beyond the $250,000 in deposit insurance that it now offers bank customers.

Washington's move to stand behind the banking industry underscores the aggressive efforts underway by officials throughout the government to prepare for the worst — including potential runs on deposits as the economic outlook darkens.


"The banks are in very good shape, but people are panicking anyway," said Karen Petrou, a managing partner at Federal Financial Analytics who advises bank executives on policy issues.

The move has divided the industry. Smaller banks, which heavily depend on deposits and are eager to show customers that their money is safe, have been lobbying policymakers to expand the federal guarantee of the banking system. The largest banks, which have nationwide operations and vast funding sources, don't think it’s needed and fear it could be cast as a new bank bailout.

The legislation, signed Friday by President Donald Trump, would also open the door to the FDIC guaranteeing the debt of banks themselves to shore up another funding source for lenders if they hit hard times. The Depression-era agency, which was created to restore confidence after a series of desperate bank runs by customers, would still need to decide how it wants to use the authority.

Lawmakers involved in the effort argue that they want people to be reassured that their money is safe in American banks as the economy teeters.

"The best way to assure them is to let them know that there will be no run on a bank that the bank can't cover — meaning all of the deposits will be covered," said Rep. Al Green (D-Texas), who sponsored an earlier House version of the account guarantee legislation.

While bankers who support the measures say they aren't seeing widespread withdrawals, they also want to make clear to their customers that they have no reason to worry.

"The fact that most bank lobbies are closed is something that I'm sure causes anxiety and is distressing for consumers," said Noah Wilcox, chairman and CEO of Wilcox Bancshares in Grand Rapids, Minn. "To be able to tell consumers, 'Hey, everything's taken care of, the federal government has your back on this,' really puts them at ease."

Wilcox is chairman of the Independent Community Bankers of America, a trade association that has led the lobbying campaign to enact a new FDIC account guarantee. The group exclusively represents the nation's smallest lenders.

"Better safe than sorry," said Paul Merski, the community bank association's vice president for congressional relations and strategy. "We get a lot of reports from our 5,000 banks around the country. So far, we've seen just a minor increase in demand for cash."

In the legislation, lawmakers are reviving authority that the FDIC used during the 2008 bank rescue, but that Congress later restricted — just one of a number of ways the coronavirus pandemic has Washington dusting off powers it last wielded during the Wall Street bailout.

"It was included to give the agencies the tools they need to appropriately respond to the circumstances as they evolve," said a spokesperson for Senate Banking Chairman Mike Crapo (R-Idaho).

But unlike in 2008, banks have stressed that they are in strong shape and don't need a government handout.

Large and small lenders were forced to comply with layers of new regulations in the wake of the last crisis to help ensure their solvency. The measures appear to have paid off, with banks now trumpeting that they're able to contribute to the economic relief effort.

But Green, who represents a Houston-area congressional district, said he was motivated to work on account guarantee legislation after hearing the concerns of a small minority-owned bank, among others.

He cited the example of large churches that make deposits in small banks above $250,000. There are concerns that the churches could pull their money out if they fear their bank won't survive.

Banks are worried about the same behavior by their business customers, whose accounts fluctuate above and below the existing $250,000 FDIC insurance limit as they take care of payroll and payments to suppliers.

"I received an indication that people were coming in and withdrawing amounts that were larger than normal," Green said. "I received an indication that people may become concerned about smaller banks and move their money to other institutions. These smaller banks need to maintain their deposits to function."

Rep. French Hill (R-Ark.), who serves on the House Financial Services Committee with Green, cited uncertainty on the part of consumers about whether banks are being forced to close like other businesses — even as banks continue to operate through the crisis.

"I'm encouraging my bank commissioner and bankers and my governor to speak publicly about this, and do some advertising," Hill said. "Banking is a critical infrastructure."

Smaller banks have also argued that an account backstop would help them stay competitive with money market mutual funds, which are set to receive their own government guarantee during the pandemic. The funds offer an alternative place for businesses to park cash.

For the largest banks, the calls are a risky distraction at a time when they say they don't need the help. Some have even worried that it could fuel financial panic.

One large bank lobbyist who declined to be named said the biggest banks "have fortress balance sheets, diversified income streams and as a result are seeing large deposit inflows; they have no need for the government to guarantee more of their liabilities.”

"Their fear — and it's a very reasonable one — is that this is going to be seen as another bank bailout," Federal Financial Analytics' Petrou said. "They didn't ask for it. The system in fact doesn't need it. The money was flowing into the big banks anyway."

Small banks counter that the bigger banks don't need it because they still enjoy an unofficial government backstop, with Washington unwilling to let them go under.

"They're too big to fail," said Robert Fisher, CEO of Spencer, New York-based Tioga State Bank.

Bert Ely, a banking consultant, said the FDIC should be cautious about how it uses the authority amid heightened concern about the state of the financial system.

"There's a lot of psychology that comes into play here," Ely said. "What signal does that send? Does that really help to stabilize the situation or would it be potentially destabilizing?"

The FDIC declined to comment on the legislation but is stepping up efforts to boost consumer confidence in the banks.

FDIC Chairman Jelena McWilliams this week released a video discouraging Americans from taking money out of bank accounts and stuffing it under their mattresses, as many did during the Great Depression. She said no one has lost a penny of their insured deposits since the FDIC was created in 1933.

"If you're talking about having your money in a safe place," she said, "please, keep it in a FDIC-insured bank."