House panel debates FDIC resolution rules, deposit access and capital relief for community banks

Chairman Barr opened a House Financial Services subcommittee hearing on promoting the health of the banking sector, saying the panel would examine “promoting the health of the banking sector, reforming resolution and broadening funding access for long term resilience.”

The hearing brought testimony from bank executives, trade groups and policy researchers who urged Congress and the federal regulators to revise how failed banks are resolved, expand access to certain deposit types for community banks and recalibrate capital standards so that rules designed for very large, complex banks do not unduly burden smaller institutions.

Why it matters: Witnesses and members said the outcome of the debate could affect where deposits flow, how many institutions can compete for failed banks, and whether community and minority depository institutions can attract capital and deposits to fund lending in underserved communities.

The panel heard repeated calls to change the Federal Deposit Insurance Corporation's "least cost" bidding practices used in bank resolutions. Several witnesses, including Jim Baresi, a former deputy general counsel turned adviser, and Dori Wiley of Commerce Street Holdings, said the current process tends to favor the largest bidders and can exclude community or consortium bids even when smaller bidders could preserve local banking relationships. "It needs to be modified to enable smaller players to participate effectively in auctions," Baresi said, proposing live data rooms, clearer qualification criteria and evaluation of private-capital commitments as ways to broaden participation.

Witnesses and members described the 2023 failures of several banks as a vivid example. Ranking Member Foster noted that mobile banking and social media accelerated withdrawals at Silicon Valley Bank and said depositors attempted to pull nearly $40,000,000,000 in under 48 hours. That episode, witnesses said, exposed limits in the resolution and liquidity toolkit and renewed interest in rules that would let well-capitalized smaller banks bid on failing institutions or form consortium bids.

On deposit access, witnesses endorsed expanding use of reciprocal and custodial deposits for well-managed community banks. Robert James II of Carver Financial Corporation described how reciprocal deposits and partnerships provide core funding his banks use to extend loans in low- and moderate-income tracts. "Those funds will be made directly available to underserved urban and rural communities," James said of a large deposit arranged through reciprocal deposit systems. The American Bankers Association (represented by Hugh Carney) and other witnesses urged repeal or replacement of section 29 of the Federal Deposit Insurance Act as part of a broader modernization to reduce the stigma and outdated treatment of brokered deposits.

Panelists also urged regulators and Congress to recalibrate capital rules for community and regional banks. The ABA recommended indexing many static regulatory thresholds to nominal GDP so threshold levels track the size of the economy; Hugh Carney said an inflation of static thresholds has pulled more banks into enhanced requirements that were never intended for them. Several witnesses and members supported expanding the Community Bank Leverage Ratio (CBLR) or lowering its opt-in threshold to encourage more small banks to adopt a simpler capital regime, arguing that lower, clearer capital treatment would free resources for lending.

Witnesses and some members discussed other proposals on the table, including the Failing Bank Acquisition Fairness Act (to give qualifying smaller bidders a fair shot), bills to expand reciprocal deposit allowances (cited in the transcript as "HR 32 34"), and proposals to increase FDIC coverage for certain transaction accounts to protect payroll and operating deposits. The CDFI fund and minority depository institutions (MDIs) also featured in the testimony: witnesses said CDFI funding leverages private capital (witnesses cited leverage ratios and deployment figures) and is vital to community lending.

On the discount window and emergency liquidity, panelists urged reducing stigma and improving operational readiness at the Federal Reserve and Federal Home Loan Banks so institutions can access liquidity without reputational penalty. Several witnesses suggested greater confidentiality around emergency liquidity usage and better readiness in processing large volumes of requests.

Throughout the hearing members pressed witnesses on tradeoffs between minimizing immediate costs to the Deposit Insurance Fund under the FDIC's statutory "least cost" mandate and longer-term policy goals such as preserving competition and limiting industry concentration. Witnesses offered a range of technical and legislative changes — from allowing consortium bids and virtual data rooms in resolution processes to indexing thresholds and revisiting brokered‑deposit rules — but no formal agreements or votes were taken at the hearing.

The subcommittee concluded the hearing after members asked written follow-up questions; Chairman Barr said members would have five legislative days to submit additional materials for the record and directed witnesses to respond to written questions by the stated deadline. The hearing record will include written testimony and the transcript of the proceedings.

Ending: The hearing foregrounded several drafting and oversight questions for Congress and the federal banking agencies: how to make the FDIC's resolution process more competitive, how to update deposit classification rules so community banks can access stable funding, and how to tailor capital and supervisory thresholds so that they reflect institution size and risk without sacrificing safety. Lawmakers signaled they will consider multiple bills and regulatory changes in subsequent legislative and oversight activity.