Concerns Over FDIC Insurance Limit Increase

I generally oppose government expansion. It seems that more government involvement usually means taxpayers end up shelling out more money through various programs, or it leads to hindered market incentives and extra burdens on businesses. Overall, most consumers, companies, and taxpayers find themselves worse off, except for a select few. I believe that the Trump administration has been quite effective with tax policy. President Trump’s efforts to roll back unnecessary regulations—which reportedly cost the economy around $2 trillion annually—may well be viewed as wise economic decisions in the long run.

This is why I’m somewhat taken aback by Treasury Secretary Scott Bessent’s apparent support for increasing the Federal Deposit Insurance Corporation (FDIC) deposit insurance limit from the current $250,000 to a whopping $10 million.

The proposed increase in coverage isn’t merely a response to inflation; it represents a fundamental shift in FDIC policy. Established by the Banking Act of 1933, the FDIC initially set the insurance limit at $5,000 in 1935. While that seems modest today, it effectively instilled confidence among depositors at the time. This limit has been adjusted for inflation over the years; for instance, it was $100,000 in 2008 and later raised to $250,000 under the Emergency Economic Stabilization Act. According to recent reports, this current limit allows for coverage of 99% of savings accounts and most small businesses.

Small and medium-sized banks contend that increasing these limits is vital for keeping consumer confidence high regarding the safety of deposited funds. Following the collapses of Silicon Valley Bank, Signature Bank, and First Republic in 2023, there’s a sentiment that larger banks are perceived as “too big to fail,” while smaller ones struggle with competitiveness in a financially unstable system.

Sure, small and medium banks do face heightened competition. But consider small grocery stores competing against giants like Walmart and Costco—should we really create new government programs to level the playing field for them? Or take JetBlue Airways; with under $10 billion in annual revenue, it’s vying for customers against Delta, United, and American Airlines, all earning over $50 billion a year. Should the Federal Aviation Administration provide assistance to JetBlue? If we aim to bolster small businesses, where does it ultimately end?

This brings up an interesting point: Are small and medium banks genuinely losing business to the larger ones? If the argument holds that the failures of Silicon Valley Bank, Signature Bank, and First Republic caused consumer mistrust of the smaller banks, one would expect the larger banks to gain market share. Yet, FDIC deposit data tells a different story.

The term “too big to fail” (TBTF) is typically used for banks identified as Globally Systemically Important Banks (G-SIBs) by the Financial Stability Board. In the U.S., there are eight such banks, which collectively hold nearly 42% of all FDIC-insured deposits. Interestingly, they accounted for about 41% in 2022, indicating no significant shift. Since 2020, these TBTF banks have consistently represented around 41% of total insured deposits. So, there’s no clear evidence that these giants are overshadowing smaller banks.

In actuality, small and medium banks might be losing ground to alternative banking models emerging in the FinTech sector. New innovations are making it possible to deliver banking services without traditional infrastructure. Thus, raising the FDIC insurance limits likely won’t shield banks from this modern competition.

At the current limit of $250,000, 99% of depositors are adequately covered, meaning a hike to $10 million would primarily benefit large corporate deposits. Generally, both small and large businesses perform due diligence when choosing partners, including banks. While small depositors may lack the ability to investigate a bank’s stability, larger companies certainly do.

Increasing the insurance limit to $10 million would diminish the incentives for corporations and larger depositors to ensure a bank’s health. It could also encourage banks to take on riskier investments, with less concern about losing customers. After all, there’s a government guarantee backing them. Such a scenario breeds moral hazards for both banks and depositors. Although the FDIC does charge banks a premium, ultimately, it’s the U.S. Treasury—and taxpayers—who back the FDIC in times of trouble.

The Trump administration is pursuing historic deregulation aimed at minimizing government influence in business decisions. There’s no solid proof that small and medium banks are losing customers to the TBTF banks. Moreover, raising the insurance limits could foster a perilous moral hazard in the banking industry. It would be unfortunate if the president were to back an FDIC insurance limit increase that distorts the market.