Statement of CFPB Director Rohit Chopra, Member, FDIC Board of Directors, on the Proposed Special Deposit Insurance Assessment on Large Banks
Two months ago, Silicon Valley Bank and Signature Bank failed. Most Americans had never heard of these two banks. While they weren’t massive megabanks, the actions taken by the federal government make it clear that their failure had far-reaching consequences for the broader financial system.
Silicon Valley Bank and Signature Bank were both deeply dependent on “uninsured” deposits – those are the accounts that exceed the deposit insurance limits established by Congress. This means that their failure wouldn’t have been all that expensive to the FDIC.
However, the rapid flight of “uninsured” depositors throughout the banking system raised serious concerns that many more large banks would crumble as contagion spread. On March 12, 2023, the Treasury Secretary, at the unanimous recommendation of the Federal Reserve Board of Governors and the Federal Deposit Insurance Corporation Board of Directors, and in consultation with the President, invoked the statutory Systemic Risk Exception in order to protect the “uninsured” depositors.1
The banks’ shareholders and unsecured creditors lost their money. The banks’ boards and senior management were removed. But “uninsured” depositors who would have otherwise taken a hit were made whole to stabilize the system. The current estimate of the extra cost to the Deposit Insurance Fund for protecting “uninsured” depositors in these two failures is $15.8 billion.
Today, the FDIC Board is proposing a special assessment to require the banking industry to pay for that extra cost. I support the proposed special assessment because it makes large banks -- the firms that overwhelmingly benefited from this action -- foot the bill.
Background on Today’s Proposal
The law requires that the FDIC Board initiate a special assessment to recoup these funds from the banking industry, with due consideration to the types of firms that benefited from the emergency action.2 We are proposing a special assessment on banks’ “uninsured” deposits above $5 billion. About 95% of the assessment will be paid for by banks with $50 billion or more in assets, including a $9.5 billion charge on the largest too-big-to-fail banks. Many of these banks saw a surge in new accounts, since many “uninsured” depositors assume that the biggest of the big banks essentially get free unlimited deposit insurance, because they will always find a way to get bailed out.
The assessment is a small fraction of the $540 billion the banking sector earned in net income over the last two years.3 Many large banks paid out much of those profits to executives and shareholders in bonuses, buybacks, and dividends. Importantly, more than 4,500 banks, all of our nation’s community banks and many midsized banks with limited “uninsured” deposits, will not pay at all.
I am looking forward to reviewing the comments received in response to the proposal before finalizing the rule.
One of the biggest open questions on the table is whether regulators have the courage to learn, so we can avoid getting into situations that require emergency powers.
There’s a promising sign here: the Federal Reserve Board of Governors and the FDIC recently published preliminary autopsies on what went wrong at Silicon Valley Bank and Signature Bank.4 While both firms were obviously mismanaged, it was clear that lax supervision and deregulation contributed significantly to the mess. The core assumption that we could relax the oversight and the rules on large, domestic systemically important banks without posing risks to the financial system turned out to be a really bad bet.
At a minimum, we need to undo the recent weakening of key safeguards and increase the rigor of our oversight of these systemically important banks. We’ll also need to make sure that shareholders and executives have more skin in the game.
There are three other things that should be top of mind, though.
First, we need to simplify our rules while strengthening them. Too many areas of regulation across our economy have become so complicated with weird formulas, dizzying methodologies, and endless loopholes and carveouts. We need simpler rules to prevent future disasters. A better alternative is to create bright line limits, with clear sanctions, including size caps and growth restrictions. Clearly observable metrics make it easier to monitor and increase consistency.
Second, we need to stop subsidizing the largest and riskiest banks by giving out free deposit insurance. When small banks fail, they rarely lead to much cost to the FDIC’s Deposit Insurance Fund, since they can be fairly easily wound down or sold. But when large banks fail, the costs to the Deposit Insurance Fund and broader economy can be steep. To make matters worse, those institutional clients with the biggest deposits feel they can get around insurance limits by going to the biggest banks. In other words, people perceive that the biggest banks get free deposit insurance over the legal limits by way of their too-big-to-fail status.
Fixing our deposit insurance pricing structure is just one small step that could help address this problem. Large, riskier banks should pay more and small, simpler banks should pay less. We should also make the framework countercyclical, so that we aren’t in the position of raising rates when banking conditions are weak.
While today’s proposed special assessment will not fall on small, local banks, the failure of First Republic Bank will be a direct hit to the Deposit Insurance Fund that is not being recouped through this special assessment. It’s a reminder that we need to fix the fund’s pricing over the long term.
Finally, as Swiss policymakers made clear regarding the recent turmoil involving Credit Suisse, more people are saying the quiet part out loud: the current resolution plans filed by the largest financial institutions in the world, which purport to show how the firms could fail without a government bailout or economic chaos, are essentially a fairy tale.5
The latest failures are another reminder that we must work to eliminate the unfair advantages bestowed upon too-big-to-fail banks. New laws and old laws alike provide a roadmap to end too-big-to-fail and the resulting risks to financial stability, fair competition, and the rule of law.6
- https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312b.htm .
- Federal Deposit Insurance Act, Section 13(c)(4)(G)(ii).
- https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2022dec/qbp.pdf ; https://www.fdic.gov/analysis/quarterly-banking-profile/qbp/2021dec/qbp.pdf .
- https://www.federalreserve.gov/publications/files/svb-review-20230428.pdf ; https://www.fdic.gov/news/press-releases/2023/pr23033a.pdf .
- https://www.ft.com/content/2cfaaf47-101c-4695-92e5-b66b6abe777e ; https://www.consumerfinance.gov/about-us/newsroom/statement-of-cfpb-director-rohit-chopra-member-fdic-board-of-directors-on-the-living-wills-submitted-by-jpmorgan-chase-wells-fargo-bank-of-america-citigroup-goldman-sachs-morgan-stanley-state-street-and-bank-of-new-york-mellon/.
- For example, large banks must file living wills with regulators detailing how they could safely fail under Chapter 11 of the U.S. Bankruptcy Code without a government bailout. If the plans are not credible or if executing the plans would disrupt financial stability, the Federal Reserve Board and FDIC Board ultimately have the authority to shrink and simplify the firms. In addition, under the Bank Holding Company Act, the Federal Reserve Board has the authority to require large banks to shed risky nonbank assets and business lines if the firm is not well-capitalized or, importantly, well-managed.