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FDIC chair Martin Gruenberg has promised a review of the deposit insurance system by May 1.
The collapse of Silicon Valley Bank in March has led to a debate about federal deposit insurance. On one side are academics and experts who believe that the government should guarantee all deposits. In addition to protecting funds of small businesses that must keep significant cash for payroll, and preserving smaller banks that don’t have a “too big to fail” guarantee and carry risk of deposit flight, these supporters also have a secondary motive: reframing the debate about the nature of money, and the essential role government plays in its creation and maintenance. On the other side are those who see deposit insurance, capped at $250,000, a number six times that of the average deposit balance, as a consumer protection feature. Continuing the risk that the cap poses to large and more sophisticated depositors who stand to lose money if the bank collapses will instill discipline on bank managers to run their operations better, in this telling. Proponents of keeping the cap have also said that uncapped insurance would be a regressive giveaway to the rich.
Some observers have blended the two approaches, proposing increased caps for small businesses and lower ones for individuals. Federal Deposit Insurance Corporation (FDIC) chair Martin Gruenberg has promised a review of the deposit insurance system by May 1.
For a few weeks there, this was the biggest conversation in bank regulation, until everyone figured out that what depositors really wanted was not a bigger deposit guarantee but accounts that pay actual interest. And even with the recognition that customers should shop around for better interest-bearing accounts, deposit flight has generally stabilized. Meanwhile, bank regulators have offered universal deposit protection in practical reality, if not in statute.
Still, legislation has been proposed to uncap deposit insurance. And that has prompted the private equity–owned company that is one of the main beneficiaries of the cap to spring into action.
A company called IntraFi offers two products that allow large depositors to spread their money among a network of hundreds of banks, each with accounts that don’t exceed the cap and are therefore effectively covered in full by deposit insurance. The company takes a fee for facilitating these “brokered deposits.” If deposit insurance were uncapped, their business model would be worthless.
The prospect of uncapping has the extremely well-connected officials at IntraFi scrambling. In the first quarter of 2023, when Silicon Valley Bank was shuttered, IntraFi tripled its registered lobbying expenses and hired a firm known for its access to senior congressional leadership. The new lobbyists who registered to work for IntraFi have experience with senior members of Congress, as well as the Trump and Obama White Houses. It’s a full-court press to maintain a lucrative status quo.
INTRAFI BEGAN LIFE as Promontory Interfinancial Network, part of a larger firm that offered consulting services for banks and has always been a landing spot for former regulators. Gene Ludwig, former head of the Office of the Comptroller of the Currency (OCC) under Bill Clinton, was its founder. Obama SEC chair Mary Schapiro, longtime OCC chief counsel Julie Williams, and many more refugees from the Federal Reserve and the FDIC found a home at Promontory, which offered some of the largest salaries in all of banking. (At one point, Ludwig made $30 million a year.)
Promontory’s consulting business was sold to IBM in 2016, but the brokered deposit business continued to thrive. Its products—Insured Cash Sweep (ICS) and the Certificate of Deposit Account Registry Service (CDARS)—each worked slightly differently, but toward essentially the same purpose. Promontory Interfinancial assembled networks of thousands of banks that can spread around large deposits. The robust network could in theory insure a deposit as large as $750 million. (In an email after publication, IntraFi says they don’t offer anything close to that figure.)
This dividing of a mega-deposit is technically legal, no different than one individual opening accounts at dozens of banks. Customers paid Promontory Interfinancial to do the legwork, making it easier for them to access their money at one account while keeping it safe. Promontory has claimed significant investment in technology and infrastructure to get the brokered deposit network up and running, but the cost the company takes on by adding one large depositor is close to zero, while the fees from customers are effectively pure profit. (In an email after publication, IntraFi spokesperson Rob Blackwell disputes this, saying that significant investments in technology, infrastructure and staff are needed as more customers sign up.)
Former FDIC chair Sheila Bair criticized brokered deposits as “just gaming the FDIC rules.”
Congress lessened the expense of brokered deposits even more in the 2018 bipartisan bank deregulation bill, S.2155, which stripped higher capital requirements on brokered deposits and removed limits on its use. Americans for Financial Reform, in a 2018 letter, said that the measure “grant[ed] financial insiders a statutory exemption from regulatory risk controls.” Donald Trump’s FDIC chair, Jelena McWilliams, also aided brokered deposits at the tail end of her tenure by enabling fintechs to get into the game.
Brokered deposits have been heavily criticized by former FDIC chair Sheila Bair, who described them as “just gaming the FDIC rules. The FDIC takes all the credit risk, and Promontory gets the profit.” There is also some research showing that banks using brokered deposits are riskier and more prone to fail. Nevertheless, the product has been around for 20 years (and it’s more than a little embarrassing that the venture capitalists and founders who were depositors at Silicon Valley Bank didn’t appear to know about it).
The world’s largest private equity firm, Blackstone, took notice of Ludwig’s money-printing machine, buying Promontory Interfinancial for $2.5 billion in 2019. The company was renamed IntraFi.
THAT BRINGS US TO TODAY, when the regional bank tumult and extraordinary actions of federal regulators to guarantee deposits at Silicon Valley Bank and Signature Bank got people thinking about deposit insurance again, spurring IntraFi into action.
Previous lobbying disclosures from IntraFi showed it paid a token $50,000 per quarter to an organization co-led by former Democratic banking staffer Dwight Fettig, usually for vague “depository issues.” That number tripled in the first quarter of 2023, and IntraFi brought on a new firm.
Lobbying reports released last week show $100,000 in expenses going in the first quarter of the year to The Duberstein Group, a well-connected lobbying firm that IntraFi has worked with in the past, in the Promontory years. The firm was founded by Ken Duberstein, a former White House chief of staff under Ronald Reagan who died last year.
Among the Duberstein Group officials registered to lobby for IntraFi are former Senate Republican leadership adviser David Schiappa; Brian Griffin, who was an adviser to former Sen. Byron Dorgan (D-ND); Katherine Winkler Keating, the former chief of staff to leading House Democrat Joe Crowley (D-NY) from 2007 to 2018 (when Crowley, who’d been favored to succeed Nancy Pelosi as the party’s House leader, was ousted in the primary by Alexandria Ocasio-Cortez); Benjamin Howard, a legislative affairs staffer in the Trump White House; and Elizabeth Kelley, a special assistant to President Obama and a Senate staffer for two Montana Democrats.
Schiappa and Howard were listed as working for IntraFi in the first quarter, on “issues related to banking.” IntraFi’s $50,000 in lobbying with Porterfield, Fettig & Sears remained in Q1.
While these lobbying amounts are relatively modest, there’s also IntraFi’s parent company, Blackstone, which spends more than $5 million on lobbying every year, much of it on “issues related to financial services.” That lobbying has continued in 2023.
Moreover, this is not the only way a high-level firm can interact with policymakers. The IntraFi board of directors includes several former government officials, including Joe Carapiet, a staffer for former vice chair of financial supervision Randal Quarles at the Federal Reserve; Erica Bovenzi, former FDIC deputy general counsel; ex-Treasury Department official Eli Nagler; and Mark Jacobsen, the IntraFi CEO, who has been chief of staff at the FDIC and OCC. Others are executives across the financial services industry, from banking to private equity.
Two board members stand out. Edward Yingling was the president and CEO of the American Bankers Association for six years, and Camden Fine was the longtime president of the Independent Community Bankers of America (ICBA). Both could get meetings with top members of Congress or regulators anytime they want.
Fine in particular has been lobbying in public to maintain limits on deposit insurance. In one tweet, he stated, “Do we want a banking system where the Gov’t decides which businesses get credit and which don’t? Which individuals get credit and which don’t? That is what we will be sliding toward if all deposits are guaranteed all the time. There will be a steep regulatory price to pay!” The tweet did not mention his presence on the board of a company that benefits from limited deposit insurance.
In an email, Fine told the Prospect that “bankers are well aware that I am on the IntraFi board, and when on occasions I have been contacted by those on the Hill and in other places, I disclose this fact.” He added that his position on deposit insurance has been consistent throughout his banking career, and that higher caps or unlimited guarantees would lead to stricter regulation and more costs. IntraFi “is putting small banks like the one I used to own on a level playing field with too big to fail banks,” Fine said. Uncapped deposits, by contrast, “would nationalize the banks.”
IntraFi did not respond to a request for comment.
The movement to stop changes to deposit insurance has had early success. Grover Norquist’s Americans for Tax Reform led dozens of conservative groups in a letter opposing any alterations, on the grounds that it “will make the banking sector more reliant on the federal government.”
That would seem to foreclose the opportunity for legislative changes. But just in case, IntraFi and its powerful network of supporters are ready, along with banks opposed to the higher assessments that would likely accompany the higher deposit limits. All that presents a steep wall to climb for those who think deposit insurance should be universal.
This story has been corrected to update Ed Yingling’s term of service at the American Bankers Association.
