US Lawmaker Urges Government to Guarantee All Deposits to Avoid Runs on Smaller Banks

A U.S. congressman has urged the federal government to temporarily insure every bank deposit in the country. Following the collapses of several major banks, he stressed that if the government does not do this, there will be a run on smaller banks. “This is a contagion that could be spread across the entire banking system,” he warned.

Lawmaker Warns of Runs on Smaller Banks

U.S. Congressman Blaine Luetkemeyer (R-MO), a former banker and a member of the House Financial Services Committee, said last week that the government should temporarily insure every bank deposit in the country.

His statement followed the collapses of several major banks, including Silicon Valley Bank and Signature Bank. To prevent economic damage, the Biden administration and regulators guaranteed all deposits at the two banks, even those exceeding the $250,000 Federal Deposit Insurance Corporation (FDIC) deposit insurance limit.

Noting that expanding the deposit guarantee would “give the system confidence,” Luetkemeyer was quoted by Politico as saying:

If you don’t do this, there’s going to be a run on your smaller banks … Everyone’s going to take their money out and run to the JPMorgan’s and these too-big-to-fail banks, and they’re going to get bigger and everybody else is going to get smaller and weaker, and it’s going really be bad for our system.

“The thought process here is that this is a contagion that could be spread across the entire banking system if it’s not contained and if people don’t stop and be calm about their assessment of the situation,” the congressman opined.

He suggested that the government could guarantee “every single deposit in this country and every bank” for six to 12 months until the “interest rate situation [is] resolved and these banks get back on solid footing,” the news outlet conveyed. However, the publication noted that the congressman later changed his position, and a spokesperson for him stated that the guarantee could be in place for “perhaps 30 to 60 days.”

On Friday, Peter Orszag, the CEO of financial advisory firm Lazard, shared a similar view in an interview with CNBC. “Regional banks have relied on the business model that relied on uninsured deposits,” he said, adding:

Here’s what needs to happen at this point: the government needs to make explicit what a lot of people are assuming, which is that for the foreseeable future, uninsured deposits don’t exist. Everything is insured.

Regarding whether doing so will lead to a moral hazard where banks feel they can “take remarkable risks with depositors’ money,” Orszag insisted: “I don’t think it will create a moral hazard.” While emphasizing that “There’s going to be a lot more regulation,” he noted: “You are going to see continued flow of deposit concentration.”

While some people, like Congressman Luetkemeyer and Orszag, have expressed the need for the federal government to guarantee all deposits in the country, Treasury Secretary Janet Yellen told the Senate Finance Committee on Thursday that not all deposits will be guaranteed. Nonetheless, she insisted that “our banking system remains sound.”

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