FDIC Launches Proposal for Higher Insurance for Business Bank Accounts
In the future, companies could bank with little to no fear of losing all their money if their bank fails, if the reforms proposed by the Federal Deposit Insurance Corporation (FDIC) become a reality.
The FDIC released a report Monday outlining options for changing the deposit insurance system to protect against the bank run that brought down Silicon Valley Bank in March. The regulator was in favor of increasing the current insurance limit for certain accounts, including business checking accounts. It also laid out the pros and cons of leaving the current system essentially intact and raising the $250,000 limit on insured deposits or offering unlimited insurance on all deposits.
The decision of whether and how to change the deposit insurance system ultimately rests with Congress, not the FDIC itself. Monday’s report advises lawmakers on what the FDIC sees as the benefits and risks of each possible approach. Changing the deposit insurance system would affect the stability of the banking system and who would be left behind if a bank went bankrupt.
The report is the latest attempt by authorities to deal with the consequences of the collapse of the SVB and find ways to prevent history from repeating itself and to keep the financial system stable. It came on the same day that the banking regulator seized the assets of the failing First Republic Bank and sold them to JP Morgan Chase.
In the report, the FDIC said offering very high or unlimited deposit insurance for business checking accounts would greatly discourage bank runs while minimizing the drawbacks of increased deposit insurance.
In reforming the deposit guarantee system, the FDIC aims to balance different risks. The most pressing threat, bank runs, is why the FDIC was created in 1933 to stem a wave of bank panics in the early years of the Great Depression. In a bank run, many depositors withdraw their money at the same time, often demanding more money than the bank carries or can easily get, causing the bank to go under and many depositors unable to get their money back.
Deposit insurance prevents bank runs by assuring customers that in the event of a bank failure, the FDIC will heal them. Initially, the FDIC’s insured accounts were worth up to $2,500, which Congress has repeatedly increased over the years.
While FDIC insurance has been successful in curbing bank runs, the failure of Silicon Valley Bank revealed growing threats to its effectiveness: Companies often have multimillion-dollar deposits that aren’t covered by the FDIC, so they have still enough incentive to start and participate in bank runs. Today, 46% of all bank deposits are uninsured, the highest percentage since 1949, the FDIC said in the report.
Removing the $250,000 limit on insured deposits, as some lawmakers have called for, would remove the threat of bank runs, but would also bring risks, according to the FDIC’s analysis. Namely, that savers would have little reason to put their money in financially healthy banks; and that the Deposit Guarantee Scheme – which is funded by a tax on banks – should set aside much more money to cover emergencies.