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White House: smaller community banks shouldn't shoulder the tab for 2 failed banks

SACHA PFEIFFER, HOST:

The price tag for two big bank failures this month is expected to top $22 billion. The Biden administration says small community banks should not be stuck with that bill. That's one of several recommendations the White House is making to bank regulators. And it comes after two days of congressional hearings with lots of finger-pointing about who's to blame for the collapse of the banks and how to prevent similar meltdowns. NPR's Scott Horsley joins us now. Hi, Scott.

SCOTT HORSLEY, BYLINE: Good morning, Sacha.

PFEIFFER: Scott, the White House has been adamant that taxpayers will not be on the hook for this bailout. So where is the money going to come from?

HORSLEY: It's going to come from other banks. And as you say, it's a lot of money. Remember, the government decided to backstop all the customers at Silicon Valley Bank, and the vast majority of those deposits were over the $250,000 limit that's typically covered by deposit insurance. By law, the FDIC has to recover any shortfall in its insurance fund by imposing a special assessment. That's a kind of one-time tax on other banks around the country. And that brought howls of protest this week from lawmakers like Andy Barr of Kentucky.

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ANDY BARR: The vast majority of community banks in my district are well managed, and those Kentucky banks and their customers have been asking me why they should have to pay an assessment for your rescue of Silicon Valley Bank with a 100% guarantee of deposits of largely wealthy, sophisticated depositors. I think this is a legitimate question.

HORSLEY: In fact, it's a question we heard over and over this week from members of Congress. Now, the FDIC does have some latitude to decide how the bill is divvied up among different categories of banks. And the FDIC is expected to spell out its recovery formula in just about a month.

PFEIFFER: Scott, this legislator just addressed this question in part, but why is the White House trying to protect community banks from being saddled with this cost?

HORSLEY: The administration's argument's twofold. First, it says community banks were not to blame for the problems at Silicon Valley. And second, they say they want to maintain a healthy mix of banks of all different sizes. You know, historically, the U.S. has tended to have a lot more small banks than many other countries. And Treasury Secretary Janet Yellen said last week that while big banks are certainly important for the economy, small banks provide services in a way that a lot of those big banks can't match.

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JANET YELLEN: These banks provide vital credit and financial support to families and small businesses and often have specialized knowledge and expertise in the communities they invest in.

HORSLEY: Now, this episode has also prompted a fresh look at deposit insurance overall, whether that $250,000 limit is too low, especially for businesses and needs to be raised. If it is, how would that cost be shared among different banks? Unlike the special assessment, that's something that's going to take an act of Congress.

PFEIFFER: Scott, the White House is also recommending some beefed-up oversight of mid-sized banks. What can you tell us about that?

HORSLEY: Yeah, the collapse of Silicon Valley Bank has shown that even a mid-sized bank failure can do a lot of damage, especially if depositors at other banks get spooked and start to pull their money out. So the administration is urging regulators to impose stricter rules on banks that are the size that Silicon Valley was. Rules like that had been put in place after the financial crisis under the Dodd-Frank law. But those rules were watered down in recent years, starting during the Trump administration. The Biden administration has put in a new crop of regulators, and they're likely to pursue a tougher approach. Now, all of this is just a suggestion from the administration. These are independent regulatory agencies. But since Biden did appoint a lot of the regulators, the suggestion is likely to be taken seriously.

PFEIFFER: NPR's Scott Horsley, thank you.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.

Sacha Pfeiffer is a correspondent for NPR's Investigations team and an occasional guest host for some of NPR's national shows.
Scott Horsley is NPR's Chief Economics Correspondent. He reports on ups and downs in the national economy as well as fault lines between booming and busting communities.