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Earlier this month, as Silicon Valley Bank and Signature Bank failed in rapid succession, federal regulators took the extraordinary measure of waiving the Federal Deposit Insurance Corporation (FDIC) deposit insurance limit of $250,000 for those two institutions. Citing a “systemic risk exception,” the move protected uninsured depositors–but only at these two banks. Absent a more permanent policy change, many depositors fear that their money won’t be guaranteed unless it’s in a large, “systemically important” bank.
In order to restore confidence in the banking system and stem the dangerous outflow from regional and community banks, Congress must act now to raise the FDIC insurance limit to $10 million. This threshold would provide meaningful protection to small and medium-sized businesses and ensure a solid base of deposits that aren’t susceptible to bank runs.
Two of the primary policy goals of FDIC insurance are to provide confidence and stability in the banking system. Exception-based coverage undermines these objectives. It signals to depositors that they might get some extra protection at a systemically important bank. As a result, larger depositors are moving their balances out of regional and community banks and into the biggest national banks, further consolidating our financial system into the hands of a few institutional giants.
Commercial deposits are a primary funding source for commercial banks. Unless the insurance limit is raised, we could see more commercial banks fail, leading to a permanent reshaping of the banking landscape–one that reduces competitiveness, hinders the ability of small businesses to operate, and restricts the availability of capital. As more deposits are moved up to the largest banks or out of the banking system altogether, regional and community banks will be starved of liquidity, which will cause irreparable harm to the economy.
A robust and diverse banking system is vital to American small businesses and the health of our economy overall. According to the Federal Reserve, “small business loans play a larger role in the portfolios of small banks than they do in the portfolios of large institutions.” During the pandemic, community banks made 60% of all Paycheck Protection Program loans and 72% of the loans to minority-owned businesses. Increasing the deposit insurance level would allow businesses to retain their deposits with regional and community banks, ensuring these banks have the liquidity needed to lend to the small businesses that power our economy.
Making it incumbent on large depositors to move their money if they perceive risk can, in fact, compound that very risk and create a downward spiral of deposit exits, as we have seen this month with SVB and other regional banks. Expanded deposit insurance will allow depositors to have greater confidence in banks and add resiliency to the banking system overall by reducing the volatility of deposits.
Some are advocating for unlimited deposit insurance, but this has its own pitfalls. Banks are strongest when they have a diversity of funding sources. Concentrating a bank’s liquidity among just a few very large deposits could cause banks to be over-reliant on those accounts. Having a meaningful cap is important for managing deposit concentration risk.
Fortunately, some policymakers have already stated their intentions to consider raising the FDIC insurance limit, which requires a resolution from Congress. While the exact amount may be up for debate, there’s no doubt that this is the right move.
During the 2008 financial crisis, the FDIC deposit insurance limit was raised to $250,000 with the idea that individuals and businesses with deposits above that amount are more sophisticated about investments and their ability to handle risk.
However, we can’t reasonably require small businesses to properly underwrite individual banks and assess systemic-level risk–especially when bankers, investors, and regulators were themselves unable to do so during the last two crises. What’s more, as a commercial deposit limit, $250,000 is almost meaningless, barely covering the operating cash for many small businesses, let alone for a medium business or large corporation.
Federal leaders must act now to bolster confidence in the banking system. This will strengthen regional and community banks and limit the systemic risk of fewer and larger “too big to fail” mega-banks, provide clearer expectations for depositors, and ensure that money is circulating, especially to the small businesses that keep our economy vibrant.
Randell Leach is the CEO of Beneficial State Bank, a state-chartered, federally insured, and for-profit bank whose economic rights are majority-owned by the nonprofit Beneficial State Foundation, which is in turn permanently governed in the public interest. Beneficial State Bank is one of the world’s top Certified B Corporations.
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