In the future, businesses could bank with little to no fear of losing all their money if their bank fails, if reforms suggested by the Federal Deposit Insurance Corporation (FDIC) become reality.
The FDIC released a report Monday outlining options for changing the deposit insurance system to guard against the bank run that brought down Silicon Valley Bank in March. The regulator favored raising the current insurance limit for certain accounts, including business payment accounts. It also laid out the pros and cons of leaving the current system essentially in place while raising the $250,000 limit on insured deposits or offering unlimited insurance for all deposits.
The decision on whether, and how, to change the deposit insurance system ultimately lies with Congress, not the FDIC itself. Monday’s report advises lawmakers on what the FDIC sees as the benefits and risks of each potential approach. Changing the deposit insurance system would affect how stable the banking system is and who would be left holding the bag when a bank fails.
The report is the latest attempt by authorities to grapple with the fallout from SVB’s collapse and find ways to prevent history from repeating itself and keep the financial system stable. It came on the same day that the bank regulator seized the assets of the failing First Republic Bank and sold it to J.P. Morgan Chase.
In the report, the FDIC said offering very high, or unlimited, deposit insurance for business payment accounts would strongly discourage bank runs while minimizing the downsides of greater deposit insurance.
In reforming the deposit insurance system, the FDIC aims to balance several risks. The most pressing threat, bank runs, is why the FDIC was established in 1933 to stop a wave of bank panics in the early years of the Great Depression. In a bank run, many depositors withdraw their money simultaneously, often demanding more cash than the bank has on hand or can easily get, dooming the bank and leaving many depositors unable to recover their money.
Deposit insurance prevents bank runs by assuring customers that in the event of a bank failure, the FDIC will make them whole. At first, the FDIC insured accounts worth up to $2,500, which Congress has repeatedly raised over the years.
While FDIC insurance has been successful at reducing bank runs, the failure of Silicon Valley Bank highlighted growing threats to its effectiveness: Businesses often have multimillion-dollar deposits that the FDIC doesn’t cover, so they still have plenty of incentive to start and participate in bank runs. By now, 46% of all bank deposits are uninsured, the highest proportion since 1949, the FDIC said in the report.
Eliminating the $250,000 cap on insured deposits, as some lawmakers have called for, would eliminate the threat of bank runs, but would carry risks of its own, in the FDIC’s analysis. Namely, that depositors would have little reason to favor putting their money in financially sound banks; and that the deposit insurance system—which is funded by a tax on banks—would have to keep a lot more money set aside to cover emergencies.