Elizabeth Warren Grills Trump Treasury Nom About Small Banks Failing While Big Ones Are Bailed Out

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At Tuesday's Senate Finance Committee hearing, Sen. Elizabeth Warren (D-MA) questioned Jonathan McKernan, nominee to be Under Secretary of the Treasury.

Transcript

00:00Thank you. Senator Warren. Thank you, Mr. Chairman, and congratulations on your nominations.

00:05So FDIC insurance is limited to $250,000, and above that, customers with bigger deposits are

00:13supposed to wait in line and hope that they can recover a portion of their funds when a bank

00:19fails. In March 2023, Silicon Valley Bank and Signature Bank both blew up, creating the third

00:27and fourth largest bank failures in American history. In order to prevent additional bank runs

00:34and a full-blown financial crisis, the Fed, FDIC, and Treasury took the extraordinary step of

00:42guaranteeing all, all uninsured deposits at those banks. That meant that huge companies like venture

00:50capital firms Sequoia, crypto company Circle, and electronics company Roku had billions of

00:58dollars in deposits, and they didn't lose a penny when those banks failed. FDIC made good on all of

01:05it. Now, I want to contrast that, as Senator Lankford did, with the treatment of two small

01:10bank failures in Oklahoma and Texas in the years after SVB crashed. Local small businesses like

01:18pharmacies, grocery stores, and construction companies that kept their payroll and other

01:24money at community banks, got $250,000 in FDIC coverage, and lost millions of dollars in the

01:33uninsured balance. People understand which banks will and won't get bailed out if there's trouble.

01:41In the week following SVB's crash, $100 billion in deposits left smaller banks, while largest banks

01:51saw $120 billion in new deposits. So, Mr. McKernan, you were a board member at FDIC in 2003 when SVB

02:02and Signature collapsed, and you saw some of those dynamics up close. Has it become clear to the market

02:11that in the event of failure, depositors at giant banks will get fully reimbursed, while depositors

02:19at small banks won't? Senator, I was at the FDIC during those events, and what I would say is,

02:26of course, by law, uninsured depositors are at risk of loss. There has been, I think, a developing

02:33market expectation. To the contrary, at least with respect to large banks. The events around SVB and

02:39Signature may have tended to reinforce that market perception. And can you explain the implications

02:44of this two-tier banking system on both the banking system and the broader economy?

02:52Yes, Senator, you know, as the Secretary has said, he's focused on Main Street, and I think what that

02:57means as a practical matter for me is a real focus on community banks. And, you know, on every Main

03:04Street, there's a community bank, too often, that's a community bank under pressure from whether

03:10it's mounting compliance burden or, as you note, this market perception that may advantage the

03:17largest banks. And so I think a central issue for financial regulation today is how we ensure that

03:25community banks continue to play a role in the financial system of the future. That is an issue

03:31that's underscored by your question. And particularly important because those community banks disproportionately

03:35are doing the lending to small businesses in our communities. So one way to help level the playing

03:41field is to increase deposit insurance limits for business transaction accounts, you know, bank accounts

03:48that businesses use to make payroll and rent. Banks that benefit from the increase would pay for this

03:56expanded coverage ahead of time through their regular deposit insurance premiums. It would help

04:03smaller banks compete. It would also require big banks to start paying for some of this insurance

04:10coverage that they've been implicitly receiving for free. If small and mid-sized businesses are

04:16protected, this could also limit the government's impulse to bail out giant banks whenever they get into

04:22trouble. So, Mr. McKernan, this idea has received broad bipartisan support. Do you think that Congress

04:30should increase deposit insurance limits for business transaction accounts?

04:36Senator, as I was discussing with Senator Langford, the Secretary's spoken on this and expressed the real interest

04:43in exploring an increase in the cap on deposit insurance for business payment accounts and all that would

04:49obviously require legislation that takes congressional action. But I did recently discuss this issue again with

04:54him. You know, he's heard this issue over and over again from many, many, many community banks that he's met with

04:59inside Treasury, outside Treasury. I think the bottom line here is the Secretary would be very eager to see

05:04legislation to that effect to, again, move the cap up on deposit insurance for business payment accounts.

05:09And can I count on you to work with Chairman Scott over in banking and me on getting that done?

05:15Yes, Senator. Okay, I appreciate that. You know, the giant banks don't need another subsidy. This is about

05:21leveling the playing field so that our community banks really have a chance to do their good work in

05:26lending to local businesses. Thank you, Mr. Chairman. Thank you, Senator Warren.

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