Stop portraying a big-bank bailout as small-business relief
by Jenn Pellegrino · The Washington TimesOPINION:
The last thing rural and small urban communities need is another federal handout to the biggest banks in America. Yet that is exactly what the misleadingly named and recently reintroduced Main Street Depositor Protection Act delivers, wrapped in populist language and sold as a lifeline for small businesses.
I grew up in a rural community in upstate New York. The local bank was where family farms got their operating loans in the spring, where shops borrowed against their inventory and where young couples buying their first homes sat across from a banker who knew their parents.
These small banks are the lifeblood of the towns they serve. A bill that claims to protect them while quietly subsidizing the country’s largest corporate depositors is a betrayal of those institutions and the people who depend on them.
The Alsobrooks-Hagerty proposal would allow the Federal Deposit Insurance Corp. to increase deposit insurance on basic business checking accounts — the kind used for payroll and day-to-day expenses — from $250,000 to $5 million.
Yet the current cap already protects 99% of all bank accounts in the United States, and the typical small business isn’t holding millions of dollars in cash.
The median balance is just $12,100, according to J.P. Morgan, meaning that most small businesses are already fully covered.
Raising the cap to $5 million doesn’t help them. It benefits large corporations sitting on massive cash reserves, not the small businesses this bill claims to protect.
The entities that really stand to benefit are not farmers and feed stores struggling to make payroll. The fine print reveals that the legislation applies to all but a handful of the very largest banks, including some with assets exceeding $100 billion.
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This is a dramatic extension of federal guarantees into a tier of banking that has far more to do with sophisticated corporate treasuries than with the small businesses and community banks it claims to protect.
That extension creates a serious moral hazard. Deposit insurance works precisely because it has limits that force corporations and the banks holding their deposits to exercise discipline. Removing those guardrails erodes the honest functioning of the entire system.
Once Washington signals that millions of dollars in operating deposits are federally protected, larger depositors have less incentive to monitor where they place their money, and banks compete more aggressively for those balances.
That is how the next crisis becomes everyone’s problem and the next bailout finds its way to the public.
Americans are still reeling from the aftermath of the 2008 financial crisis, in which Wall Street was bailed out while forgotten communities paid the costs of their recklessness. Another round of bailouts would do more than devastate the economy; it would cement the conviction that the game is rigged against forgotten communities in favor of the already wealthy and well-connected.
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Then there are the additional costs to community banks that come from two separate directions. The first is financial. Backers of the bill will point out that banks with assets of less than $10 billion are shielded from higher FDIC assessments for 10 years, but that exemption is temporary.
When it expires, local banks will bear their share of the cost of insuring a dramatically expanded pool of corporate deposits. In the meantime, banks above that threshold will pay higher assessments now and pass those costs to borrowers through higher fees and tighter credit.
The second pressure is regulatory. A larger federal guarantee invites greater federal oversight. Big banks can absorb new compliance layers without much disruption. Community banks are already straining under rules designed for institutions many times their size.
Additional regulatory burdens tied to expanded insurance would fall hardest on the institutions least equipped to carry them.
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Congress should reject this bill. The community banks that provide credit to farms, small businesses and first-time homebuyers do not need Washington to expand protections for corporate depositors at their expense. They need relief from the regulatory and cost burdens that are already making it harder to serve the communities that built them. Those are the true reforms worth fighting for.
• Jenn Pellegrino is the founder of Defend Forgotten America and a former chief spokesperson for the America First Policy Institute.