New York (CNN) Today, $250,000 seems to be the number on everyone’s mind.
That’s the standard Federal Deposit Insurance Corporation limit, meaning any bank deposit up to that amount is covered by an independent government agency.
Prior to the recent collapse of Silicon Valley Bank and Signature Bank, most Americans don’t worry about (or even think about) insurance limits at banks, because nearly all US banks are FDIC-backed.
But now there is growing support for raising that insurance limit.
Advocates, including top lawmakers such as Massachusetts Senator Elizabeth Warren, say such steps will help stabilize a sector on the brink and prevent banks from going ahead in the future, and the government has created an exemption for depositors this month.
Others argue that deposit guarantees will encourage banks to engage in risky behavior with customer money and may in effect reward irresponsible behavior.
Lawmakers and officials are raising the odds
Bloomberg reported on Saturday that a coalition of US midsize banks sent a letter to regulators asking the FDIC to expand its insurance to cover
“Doing so would immediately stop the exodus of deposits from small banks, stabilize the banking sector and greatly reduce the likelihood of more bank failures,” the Coalition of American Mid-Size Banks wrote in the letter.
Smaller banks “are concerned about depositor flight and want some form of short-term or permanent deposit insurance at at least a higher rate, if not unlimited, for some period of time,” Steve Dollar, head of financial institutions at Norton Rose Fulbright, said.
The White House has yet to take an official position, although Treasury Secretary Janet Yellen said Tuesday that the federal government could bail out uninsured bank depositors if smaller lenders suffer bank runs like the one that collapsed Silicon Valley Bank.
Several lawmakers in Congress are already exploring the possibility.
Rep. Maxine Waters, the highest-ranking Democrat on the House Financial Services Committee, told the New York Times that Congress should consider raising the insurance cap.
Senator Warren, a member of the Senate Banking Committee, said lifting the insurance cap would be a “good move” on CBS Sunday, suggesting a range of $2 million, $5 million and $10 million.
Why is it important?
The million-dollar insurance cap would cover an amount that most Americans wouldn’t have to worry about on their deposits, of course.
But Warren said such limits would help small businesses operate and do payroll, which would affect day laborers, among other things.
It will also help remove incentives for big depositors at the banks we all share to cash out at any sign of discomfort, said J. Michael Collins, a professor at the University of Wisconsin who focuses on consumer finance.
“When we know that the big depositor isn’t going to run and take all the money, then we can be guaranteed to get a much smaller amount back,” Collins said.
What does moral hazard have to do with this?
Moral hazard is a scenario in which one party engages in risky behavior because it is protected from any consequences. In the case of banks, that means they would be more likely to take riskier bets if they knew they were better protected, increasing the likelihood of a repeat of this month’s mess.
Officials must take these tradeoffs into account when contemplating policy changes, especially if removing boundaries altogether.
The term has been coined recently, after the government intervened in a banking crisis to support depositors of failing banks. Regulators are careful to emphasize that they are not saving banks, as they did during the 2008 financial crisis, but rather helping groups of depositors to avoid systemic risks to the banking system.
Higher insurance limits don’t automatically mean banks will be subject to stricter regulation, Dollar said, but there may be some calls for it.
How can it be bypassed?
There is definitely precedent for improvement. During the 2008 financial crisis, the insurance limit was temporarily increased from $100,000 to $250,000 per depositor, after former President George W. Bush signed the Emergency Economic Stabilization Act. It became permanent in 2010 as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed by Congress.
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The FDIC’s insurance cap has been raised seven times since 1950 — and $250,000 isn’t a figure that counts either, says Collins. “The insurance premium is good, a round figure.”
The FDIC was called A systemic risk exclusion to take action against SVB and Signature Bank and make their depositors whole again. In 2008, the FDIC used the same system for temporary unlimited deposit insurance coverage on certain accounts. The FDIC can do similar steps now using A systemic risk exclusion, Dollar said.
What are the chances that hats off?
MPs have started talking, but no action has been taken.
On Sunday, Rep. Republican Patrick McHenry, who chairs the influential House Financial Services Committee, told CBS he had not had “one conversation” with the Biden administration about raising the limit, but said all options should be on the table.
Raising the cap is “not a pure play into allowing for greater insurance coverage,” McHenry said. “This puts a significant strain on the financial system, and especially community banks.”
Will my tax dollars pay for the higher limit?
Because it is an independent government agency, the FDIC does not receive congressional appropriations, and is instead funded by premiums from banks and savings associations.
The FDIC must match the fee charged by the member institution if there is a permanent increase.
“The way you will feel as a consumer [would be through] a slightly lower interest rate on your savings,” says Collins, or “pierces through the system as a fee here and there.”
Billionaire hedge fund manager Nelson Peltz suggested to CNBC that the government should insure all bank deposits, but bank customers should incur insurance fees.
“You create revenue for the Fed, and in return they insure the excess,” Peltz said.
Banking officials and regulators are adamant that the protective measures taken so far will not hurt taxpayers directly.
“I’m pleased they reached a quick solution that protects American workers and small businesses, and keeps our financial system safe,” President Joe Biden said Sunday as steps were announced to ensure SVB depositors could access their cash. “The solution also ensures that taxpayer dollars are not at risk.”
— CNN’s Allison Morrow contributed to this story.