ICBA advances latest principles for deposit insurance reform to focus policy debate

The large bank failures of 2023 demonstrated the clear need to reform the nation’s deposit insurance system. With lawmakers working to gather input and offer deposit reform proposals, ICBA has worked with community bankers to shape recommended reform principles to inform this much-needed debate.

Recently introduced bipartisan legislation has provided a good starting point for these discussions, and ICBA will continue to advance our principles to ensure reforms reinforce ongoing depositor confidence in community banks, protect community banks from high-cost assessments, and curb the implicit guarantees now offered to the largest too-big-to-fail banks.

Opportunities for needed deposit insurance reform

Deposit insurance is a critical tool for reassuring depositors in times of uncertainty and for preserving the strength of the nation’s banking system, but the status quo has proven inadequate in the wake of the 2023 large bank failures kicked off by the collapse of Silicon Valley Bank.

Fueled by depositor uncertainty, those failures and regulators’ response of applying systemic risk designations to the failed institutions drew down the Deposit Insurance Fund (DIF) while again reinforcing the too-big-to-fail guarantee for large institutions. Even for community banks that did not experience material deposit flight from these events, the lesson learned for all was that depositor confidence can quickly deteriorate when coupled with modern-day social media speculation, misleading narratives, and the implicit guarantees of too-big-to-fail.

With the regulatory response to the 2023 failures reinforcing the too-big-to-fail guarantee, fundamental reforms are needed to promote continued confidence among bank customers, especially for small-business account deposits held for payroll and operating expenses. The right reforms can bolster the financial stability of the banking system, ensure community banks don’t have to pay for the risks posed by large financial institutions, and preserve economic stability in the communities that depend on community bank lending.

Quite simply, doing nothing is not an option. We can’t wait for the next crisis to advance changes to our deposit insurance system. As an industry, we must act now.

How ICBA is advancing reform

As the debate has advanced, ICBA and its Deposit Insurance Working Group prepared a comprehensive set of deposit insurance reform principles to ensure proposed solutions for deposit insurance reform recognize community banks’ role in the banking system.

Those fundamental principles encourage lawmakers to:

• Promote depositor confidence in community banks to prevent deposit flight to too-big-to-fail banks.

• Curb the implicit too-big-to-fail guarantee.

• Control the cost of deposit insurance for community banks.

• Provide increased coverage for uninsured deposits.

• Expand the FDIC’s ability to promptly protect community banks and their customers during crises.

• Ensure the bank-funded DIF is not used to bail out or protect nonbanks.

New legislation is a key step in deposit insurance reform

These advocacy principles have contributed to a vital congressional debate over how to reform the deposit insurance system. That debate has ramped up in recent weeks, with ICBA weighing in on a Senate Banking Committee hearing and supporting new legislation to strengthen the deposit insurance system.

Introduced by Sens. Bill Hagerty (R-Tenn.) and Angela Alsobrooks (D-Md.), the Main Street Depositor Protection Act (S. 2999) would:

• Provide expanded deposit insurance coverage of up to $10 million per depositor for deposits held in noninterest-bearing transaction accounts to support depositor confidence.

• Ensure that during a 10-year transition period, no bank with assets of $10 billion or less would be required to pay any special assessment or increase in assessments to the FDIC to offset any impact on the DIF’s reserve ratio resulting from the additional insurance coverage.

As ICBA said in a letter to Hagerty and Alsobrooks, the bill is a great step to promote balanced deposit insurance coverage across the banking industry, strengthen the deposit insurance system, and support small businesses that use transaction accounts for payroll and other recurring expenses—while mitigating the cost impact on community banks. The 10-year transition will help ensure the DIF is appropriately funded for the expanded coverage.

ICBA is very encouraged by the legislation’s bipartisan recognition that deposit insurance reform must mitigate costs for community banks. As indicated by our deposit insurance reform principles, this is one solid step in the reform process as we continue to work to bolster day-to-day confidence in community banks and provide improved emergency measures.

A promising outlook for fundamental reform

Fortunately, the outlook for meaningful reform is positive, with Treasury Secretary Scott Bessent again indicating support for congressional efforts to modernize deposit insurance.

We know this reform effort is a major undertaking, with numerous industry priorities, policy considerations, and implications for community banks and customers. While there are many diverging perspectives across the banking industry, ICBA remains focused exclusively on the community banks it serves—including by strongly advocating on community bank cost considerations.

While the current debate is off to a strong start, ICBA and the nation’s community bankers will need to remain engaged at every level to ensure a successful outcome.