It’s disheartening to witness a repeated cycle of failures in banking regulation, though perhaps it’s not unexpected. Politicians seem inclined to tighten their grip on an already highly regulated banking sector following the Silicon Valley Bank incident.
There’s talk in Congress about a proposal that could complicate matters further. They’re considering raising deposit insurance, run by the Federal Deposit Insurance Corporation, from the current $250,000 to a staggering $10 million for non-interest-bearing accounts. That’s, what, 40 times the present limit? This move would likely increase the chances of taxpayer bailouts, curtail lending, and inadvertently reward poor financial choices.
It’s worth remembering that the Silicon Valley Bank failure happened two years ago. Surprisingly, the world didn’t end. Taxpayers didn’t end up bailing it out or other local banks. You don’t have to agree with everything Sen. Elizabeth Warren believes to see that pushing for this kind of expansion might be unnecessary.
Broadening deposit insurance to support smaller banks doesn’t actually decrease risk; it essentially shifts it to taxpayers instead.
Even the regulators themselves acknowledged shortcomings in their oversight during the Silicon Valley Bank review. They missed several warning signs that should have raised alarms.
It’s interesting to note that this bank failed its own internal liquidity tests and received three times the typical supervisory warnings. But instead of addressing these issues or looking into the regulators, we might see some lawmakers throw money at the situation and impose more regulations.
More regulations likely won’t fix the underlying issues unless enforcement of the existing ones improves. Banks already have access to the Fed’s resources, including the bank term loan program, without needing additional support.
This isn’t a new problem. You could look back to the 1980s when savings and loan institutions faced failures for similar reasons—like rising interest rates crippling their ability to meet deposit obligations.
With a relief package from Congress now in place, taxpayers may find themselves responsible for about $124 billion in bad assets. Expanding deposit coverage could undermine the deposit insurance fund’s viability and push costs onto taxpayers in a crisis.
The U.S. already boasts the highest deposit insurance coverage in the world; over 99% of accounts are fully insured up to the current $250,000 limit. The average small business account holds about $12,100, while the typical household account has around $5,300.
Every dollar in insurance premiums paid to the FDIC isn’t being channeled into economic growth. The estimation shows the FDIC would need over $10 billion immediately from banks, along with upwards of $1 billion annually in premiums. For context, banks contributed about $12 billion to the Deposit Insurance Fund last year.
These additional costs will likely filter down to consumers, resulting in less lending. An FDIC investigation indicated that expanding deposit insurance tends to drive up borrowing costs and limit lending capabilities.
Additionally, the new proposal could confuse depositors who mistakenly believe they’ll automatically benefit from that $10 million limit. Breaking down deposit insurance into two distinct parts could complicate understanding.
The government shouldn’t be in the business of favoring certain banks over others. Broader coverage creates moral hazard, as it leads customers to overlook a bank’s actual financial condition.
This approach could inadvertently cause the imbalance it aims to resolve—encouraging depositors to move funds to smaller banks offering higher limits rather than pushing banks to manage deposits responsibly. Those banks nearing insolvency might also be less inclined to change course, similar to what we saw with Silicon Valley Bank before its collapse.
Even with vigorous initiatives like Dodd-Frank, failures in the banking sector continue. Increasing deposit insurance coverage will only exacerbate costs if a bank does fail.
Ignoring market dynamics and placing costs on taxpayers could make failures more likely. Rising insurance premiums imply reduced lending options, elevated borrowing expenses, and the diversion of government deposits to favored institutions.
Lawmakers should really consider the ramifications before agreeing to expand deposit insurance.
