What would a federal expansion of deposit insurance look like?
Right now, $250,000 seems to be the number on everyone’s minds.
That’s the Federal Deposit Insurance Corporation’s standard limit, meaning any bank deposits up to that amount are protected by the independent government agency.
Before the recent collapse of Silicon Valley Bank and Signature Bank, most Americans were not worried about (or even thinking about) insurance limits on banks, since almost all US banks are backed by the FDIC.
But now there’s growing support for raising that insurance cap.
Advocates, including prominent lawmakers such as Massachusetts Senator Elizabeth Warren, say such measures will help stabilize a sector on the brink and prevent future bank runs, and that the government has already made exceptions for depositors this month.
Others argue a sweeping deposit guarantee would encourage banks to engage in riskier behavior with customers’ money and might essentially reward irresponsible behavior.
Bloomberg reported Saturday that a coalition of midsized US banks sent a letter to regulators asking for the FDIC to expand its insurance to cover all bank deposits for the next two years to help restore confidence in the banking system.
“Doing so will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce the chances of more bank failures,” the Mid-Size Bank Coalition of America wrote in the letter.
Smaller banks “are concerned with depositor flight and want some form of short-term or permanent deposit insurance at at least a higher level, if not unlimited, for some period of time,” Steve Dollar, head of financial institutions at Norton Rose Fulbright, said.
The White House has not taken an official position, although Treasury Secretary Janet Yellen said Tuesday that the federal government could rescue uninsured bank depositors if smaller lenders suffer bank runs like the one that collapsed Silicon Valley Bank.
Some Congressional lawmakers are already exploring the possibility.
Rep. Maxine Waters, the highest-ranking Democrat on the House Financial Services Committee, told the New York Times that Congress should consider raising the insurance limit.
Sen. Warren, a member of the Senate Banking Committee, said lifting the insurance cap would be “a good move” on CBS Sunday, suggesting ranges of $2 million, $5 million and $10 million.
An insurance cap of millions of dollars would cover an amount that most Americans don’t have in their bank to worry about ever having on deposit, of course.
But Warren said such a cap would help small businesses operate and make payroll, among other things that would affect everyday workers.
It would also help eliminate the incentive for large depositors in banks we all share to take their money out at signs of unease, said J. Michael Collins, a professor at the University of Wisconsin who focuses on consumer finance.
“When we know that those big depositors won’t make a run and take all the money out, then we’re guaranteed we can get our much smaller amounts back,” Collins said.
Moral hazard is a scenario where one party engages in risky behavior because they are shielded from any consequences. In the case of banks, that means they will be more likely to take on riskier bets if they know they are more protected, raising the possibility of a repeat of this month’s chaos.
Officials will have to take this tradeoff into account when considering policy changes, especially if scrapping the limit altogether.
The term has been thrown around lately, after the government intervened in the banking meltdown to support the failed banks’ depositors. Regulators have been careful to stress that they are not bailing out banks, as they did during the 2008 financial crisis, but rather are aiding groups of depositors to avoid a systemic risk to the banking system.
A higher insurance cap doesn’t automatically mean banks will be subject to tighter regulations, Dollar noted, but there could be some call for it.
There is certainly precedent for an increase. During the 2008 financial crisis, the insurance limit temporarily increased from $100,000 to $250,000 per depositor, after former President George W. Bush signed the Emergency Economic Stabilization Act. It became permanent in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by Congress.
The FDIC insurance limit has been raised seven times since 1950 — and $250,000 also isn’t a calculated number, Collins said. “The insurance premiums are nice, round numbers.”
The FDIC invoked a systemic risk exception to take action on SVB and Signature Bank and make its depositors whole again. In 2008, the FDIC used the same system for temporary unlimited deposit insurance guarantee on certain accounts. The FDIC could make similar moves now using a systemic risk exception, Dollar said.
Lawmakers have begun talking, but no action has been taken.
On Sunday, Republican Rep. Patrick McHenry, who chairs the influential House Financial Services Committee, told CBS he hasn’t had “a single conversation” with the Biden administration on raising the cap, but said all options should be on the table.
Lifting the cap is “not a pure play of allowing a larger set of insurance coverage,” McHenry said. “It costs the financial system significantly, and especially community banks.”
Since it is an independent government agency, the FDIC receives no Congressional appropriations, and is instead funded by premiums from banks and savings associations.
The FDIC would have to adjust the fees required by member institutions if there was a permanent raise.
“The way you would feel it as a consumer [would be through] slightly lower interest rates on your savings,” Collins said, or “percolating through the system as a fee here and there.”
Billionaire hedge fund manager Nelson Peltz suggested to CNBC the government should guarantee all bank deposits, but bank customers should be charged for insurance.
“You’re creating income for the Fed, and in exchange for that they insure the overage,” Peltz said.
Banking officials and regulators have been adamant in saying the protective steps taken so far would be at no direct cost to taxpayers.
“I am pleased that they reached a prompt solution that protects American workers and small businesses, and keeps our financial system safe,” President Joe Biden said Sunday when measures were announced to ensure SVB depositors would be able to access their cash. “The solution also ensures that taxpayer dollars are not put at risk.”