FDIC Says Insurance For Deposits Could Change

In the wake of yet another major bank collapse, the Federal Deposit Insurance Corporation has recommended that it increase the size of how much bank deposits are insured for some types of accounts.

On Monday, First Republic Bank became the latest bank to implode, following the early March collapse of Silicon Valley Bank and Signature Bank. Most of the clients at all three banks had balances in their accounts very much above the threshold of $250,000 that the FDIC currently insures.

As a result of this, the FDIC – which is backed by the government – decided to secure all uninsured and secured deposits at SVB and Signature Bank in hopes of decreasing the potential for future runs at other banks.

This week, the FDIC issued a new report that showed it was in support of “targeted coverage” so that business accounts could receive insurance limits that are much higher than the current $250,000 amount.

The report reads:

“Extending deposit insurance to business payment accounts may have relatively large financial stability benefits, with fewer costs to moral hazard relative to increasing the limit for all accounts. It is difficult for businesses to maintain payment accounts across multiple banks to obtain increased deposit insurance coverage.

“Payment accounts rarely involve weighing a risk-return tradeoff typical of investments that form the basis of desirable market discipline. Further, losses on business payment accounts are most likely to spill over to payroll and other businesses.”

The FDIC further said it preferred a coverage regime that was targeted rather than limited. The latter would maintain the current levels of insurance on deposits but wouldn’t “address the run risk associated with high concentrations of uninsured depositors, even with an increase to the deposit insurance limit.”

In the weeks following the collapse of the first two banks, some Democratic lawmakers have suggested that the FDIC insurance limit should be looked at again. Two people who have voiced their support of this are Representative Maxine Waters of California and Senator Elizabeth Warren of Massachusetts.

The threshold for deposit insurance has risen over time, thanks to the work of Washington lawmakers. The current $250,000 level was only increased in 2008 following the Great Recession. Before that, it was raised to $100,000 back in 1980.

And before that time, it only increased gradually from the original limit of $2,500 that was set in 1934.

The FDIC finances the Deposit Insurance Fund with bank fees that it collects. It’s used to cover any insured deposit at a financial institution that collapses. As these three banks – all of which are classified as “medium sized” – collapsed, that fund saw $33 billion wiped away from it.

JPMorgan Chase acquired First Republic Bank, as well as most of its assets and liabilities, on Monday. That means that the biggest bank in the world, in terms of market capitalization, is only going to get bigger.

Signature Bank was acquired by New York Community Bancorp for around $38 billion.

First Citizens Bank acquired Silicon Valley Bank. In that deal, the FDIC held onto $90 billion of its assets, while First Citizens received a huge discount on $72 billion of assets, purchasing them for only $16.5 billion.