(Bloomberg) -- The collapse of Silicon Valley Bank and Signature Bank and the ensuing news that US regulators were jacking up lenders’ fees for deposit insurance quickly transformed the Hilton Hawaiian Village this week into ground zero for a lobbying blitz by community lenders.
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Senior bankers attending the industry confab were fuming in paradise as they made calls to their political contacts in Washington to argue they shouldn’t have to pick up part of the tab for the errors of two much larger firms that didn’t share their neighborhood focus.
What’s more, they said, the money was going to be used to cover deposits well over the $250,000 limit, raising questions over the purpose and future of the government insurance fund, according to several people who spoke about the situation. Most asked not to be identified as conversations between lawmakers, their staffs and industry were private.
The bankers, instructed to don resort wear for a retreat that concluded Wednesday with a luau, argued it was unfair that they would have to pay more money for the management missteps of Silicon Valley Bank, which was the 16th largest lender in the US, said one of the people. They didn’t want to pay another penny, the person added. Many wanted clarity on how the extra fees would even work.
There quickly were signs that lawmakers had heard the community bankers’ message.
“Let me tell you what is happening in the next few months. Banks in Oklahoma in rural towns are about to pay a special fee to be able to bail out millionaires in San Francisco,” Republican Senator James Lankford said. “What Oklahoma banks had to do with it I have no idea.”
But as the pace of calls from community bankers in Hawaii and across the country picked up in the past several days, so has their angst.
Beyond having to kick in more money, the issues with the two mid-sized lenders were also spooking customers and could cause people to move their money to bigger banks, said one of the people.
Before Silicon Valley Bank and Signature Bank were taken over by the government, the Federal Deposit Insurance Corp. — best known for administering the Deposit Insurance Fund — hadn’t been in the news much since the 2008 financial crisis.
On Thursday, Senate Banking Chairman Sherrod Brown, an Ohio Democrat, called on the FDIC and other regulators to “strengthen the guardrails for banks to prevent failures and mitigate contagion and panic risks” and noted the two banks operated with “an exorbitantly high percentage of uninsured deposits.”
Brown later told reporters there’s already been discussions with FDIC Chair Martin Gruenberg on how the insurance fees will work.
“They could tailor this and I assume Gruenberg will,” he said. But, Brown said, the insurance premiums are small relative to bankers’ bottom lines.
The DIF, as it’s known, is a bedrock of the US financial system. It’s also been a political lightning rod because the pot is filled and re-filled by all insured banks kicking in quarterly fees known as assessments. The amount is based on formulas.
Despite occasional gripes on its costs, the system has generally worked for years.
However, Silicon Valley Bank posed a unique, two-headed problem for regulators: many depositors had more than $250,000 in their accounts, and many of them belonged to startups, businesses that desperately needed the cash.
Against that backdrop, the FDIC, Federal Reserve and Treasury Department made its announcement on Sunday that all depositors would be made whole — even those those with more than $250,000. “Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law,” the government said.
“Institutions like Silicon Valley Bank are vastly different than the community banks that operate under an entirely different business model, one that focuses on serving local communities via one-on-one relationships,” Rebeca Romero Rainey, the head of the Independent Community Bankers of America, said in a statement on Monday.
Jonah Crane, a former senior Treasury official who is now a partner at financial services investment and advisory firm Klaros Group, said the issue is particularly thorny for community bankers because of the precedent it sets.
“It’s quite clear the $250,000 cap is a fiction for now,” said Crane. “The deposit insurance cap is clearly not going to be enforced in periods of volatility, which one imagines is likely to be the case if any sizable institution is failing.”
There is some support for that, including Senator Mike Rounds of South Dakota, a senior Republican on the Banking Committee. The $250,000 figure, he said, is outdated, particularly for companies that need to meet payroll.
“Let’s figure out the best way to handle that premium, who should pay that bill. It shouldn’t be the taxpayer, it should be the people who are using the services,” Rounds said.
He said there is now a risk that without raising the cap, money will flow to banks seen as too big to fail. “Isn’t it reasonable to at least give the small to regional community banks the same opportunity to compete?” he asked.
Raising the Cap
Utah Republican Senator Mitt Romney, who made his fortune at private equity firm Bain Capital, also suggested overhauling the insurance system to protect depositors, particularly at smaller and regional banks. Larger depositors, Romney said, should pay for the fees on their newly insured deposits.
But there’s also resistance to raising the cap. Senator Thom Tillis of North Carolina, another Republican on the Banking Committee, cautioned that consumers would ultimately pay a price, potentially losing perks like free checking accounts.
“Where does that tax ultimately get paid? The depositors and the people that take out loans in their banks,” he said.
Senator Bernie Sanders, a Vermont independent, said big banks should bear the burden.
“It’s got to be Wall Street and the large banks themselves that pay for the bailout,” he said.
--With assistance from Stephanie Stoughton.
(Updates with senator comment in 11th and 12th paragraphs.)
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