In the wake of the second-worst bank failure in U.S. history, the Federal Deposit Insurance Corporation proposed a deposit insurance reform to reduce the risk of bank runs and protect the financial stability of businesses.
The FDIC recommended raising the bank deposit insurance limit for accounts holding more than $250,000, per a press release on May 1.
The bank deposit limit of $250,000 is decades old and the FDIC claimed that more flexibility to cover higher deposits would shore up confidence in financial institutions.
The report outlined three options for these reforms:
- Providing the same limited coverage but possibly raising the $250,000 threshold.
- Providing unlimited coverage to all depositors.
- Providing targeted coverage to depositors with the $250,000 threshold raised on a case-by-case basis, with business accounts for payroll receiving the highest.
The recommendation pointed to the fact that the three recent bank failures were spurred by classic bank runs, with clients cashing out in fear of losing their deposits.
As The Dallas Express reported, faith in the economy is at a low with historic inflation numbers being battled by record-breaking interest rate hikes.
First Republic Bank was seized by regulators and sold to JPMorgan Chase on May 1, per CBS News. It was the second-largest bank failure with $229 billion in assets. The biggest bank to collapse was Washington Mutual in 2008 with $307 billion in assets.
In the case of First Republic Bank, about 67% of deposits were uninsured. At the other two banks that recently went under, Silicon Valley Bank and Signature Bank, approximately 94% and 90% of domestic deposits were uninsured, respectively.
First Republic Bank depositors had withdrawn approximately $100 billion in mid-March, per AP News.
The FDIC aims to extend its powers to business accounts in order to account for modern technology that makes bank runs “faster, and more costly,” as FDIC Chairman Martin J. Gruenberg explained in a statement accompanying the new report.
As Gruenberg conceded in his statement, insuring more deposits might encourage banks to take on greater risk if they know their deposits are covered.
In addition, Gruenberg claimed that providing targeted coverage (the third option) would be the most advantageous way to reform deposit insurance since it focuses on protecting business accounts that “can result in broader economic effects” if they were to go under, per his statement.
Another advantage of this option, according to Gruenberg, is that “[business] account holders are less likely to view their deposits using a risk-return tradeoff than a depositor using the account for savings and investment purposes.”
Yet to finance this reform, the FDIC would likely need to hike its fees on banks. Many larger banks might oppose this measure, as analyst Jaret Seiberg of TD Cowen explained in a report to investors, per CBS News.
Banking giants might also lose their advantage over smaller banks.
“Unlimited coverage on payroll accounts, in our view, would be broadly positive for smaller regional and larger community banks as they would be better able to compete with the mega banks for these deposits,” Seiberg said.
