Lankford to Yellen: Will Oklahoma Community Banks Pay for the SVB Rescue? (March 16, 2023)

On March 16, 2023, Treasury Secretary Janet Yellen testified before the Senate Finance Committee on President Biden’s budget for fiscal 2024 [1]. Four days earlier, after the failures of Silicon Valley Bank and Signature Bank, Treasury, the Federal Reserve and the Federal Deposit Insurance Corporation had invoked a “systemic risk exception” to protect every depositor at both banks, including deposits above the insurance limit, and said the cost would be “recovered by a special assessment on banks, as required by law” [2]. Sen. James Lankford, an Oklahoma Republican, wanted to know whether depositors at his state’s community banks would get the same protection, and who would pay. This video shows that exchange. Quotes are from the official hearing record, Senate Hearing 118-429 [1].

Key Moments

”Will they get the same treatment that SVB just got?”

Lankford began by listing tax issues he had no time to raise, then turned to banking. “Will the deposits in every community bank in Oklahoma, regardless of their size, be fully insured now?” he asked. “Will they get the same treatment that SVB just got, or Signature Bank just got?” Yellen explained that a bank “only gets that treatment if a majority of the FDIC board, a super-majority, and a super-majority of the Fed board and I, in consultation with the President, determine that the failure to protect uninsured depositors would create systemic risk and significant economic and financial consequences” [1].

”If you go to one of our preferred banks”

“So, what is your plan to keep large depositors from moving their funds out of community banks into the big banks?” Lankford asked. “We have seen the mergers of banks over the past decade. I am concerned you are about to accelerate that by encouraging anyone who has a large deposit in a community bank to say, ‘We are not going to make you whole, but if you go to one of our preferred banks, we will make you whole at that point.’” “That is certainly not something that we are encouraging,” Yellen said. “That is happening right now,” Lankford replied. Yellen said it was happening “because depositors are concerned about the bank failures that have happened, and whether or not other banks could also fail.” “No, it is happening because you are fully insured no matter what the amount is if you are in a big bank. You are not fully insured if you are in a community bank,” Lankford said. Yellen answered that there had been “a serious risk of contagion that could have brought down and triggered runs on many banks” [1].

”Will my banks in Oklahoma pay a special assessment?”

Lankford asked whether the special assessment would fall only on larger banks. “I am not certain what the rules are around that. That is up to the FDIC to determine,” Yellen said. He then asked whether Oklahoma banks would pay to make whole Chinese investors that had been reported among SVB’s depositors. “Uninsured investors will be made whole in that bank, and I suppose that could include foreign depositors. But I do not believe there is any legal basis to discriminate among the uninsured,” she said. Lankford closed by disputing the argument that taxpayers bore no cost: banks pay taxes, he said, and “all banks make their revenue off of rates and fees and such to their account holders, which means every Oklahoman will pay higher fees in their community banks” [1].

Background: The Systemic Risk Exception

FDIC insurance normally covers $250,000 per depositor, per insured bank, for each account ownership category [3]. On March 12, 2023, the three agencies announced that all depositors at Silicon Valley Bank would have access to all of their money and that “No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.” They announced “a similar systemic risk exception for Signature Bank,” whose depositors would “be made whole,” while shareholders and certain unsecured debtholders would not be protected [2].

The Record

“That is happening right now.” The Federal Reserve’s own weekly data backed Lankford. In the week that ended March 15, 2023, three days after regulators stepped in at Silicon Valley Bank and Signature Bank, deposits at small domestically chartered banks fell by about $120 billion, to about $5.46 trillion, while deposits at large domestically chartered banks rose by about $67 billion, seasonally adjusted [7].
Who qualifies for the exception. The March 12 announcement made the systemic risk determination for those two banks specifically [2]. As Yellen described it, a community bank’s uninsured depositors would get the same protection only if regulators made a new determination, the gap Lankford was pointing to [1][2].
Who pays. Yellen said she was “not certain what the rules are around that” [1]. The FDIC’s final rule, adopted on November 16, 2023, estimated that about $16.3 billion of the cost of the two failures was attributable to protecting uninsured depositors. It said 114 banking organizations would pay the special assessment and that “no banking organizations with total assets under $5 billion will pay the special assessment” [4].

What Happened Next

A broader promise: On March 21, five days after the hearing, Yellen told the American Bankers Association that “similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion” [5].
Another failure: On May 1, 2023, regulators closed First Republic Bank in San Francisco, and JPMorgan Chase agreed “to assume all of the deposits and substantially all of the assets” of the failed bank, according to the FDIC [6]. Its 84 offices in eight states reopened as JPMorgan branches [6].