The Federal Deposit Insurance Corporation, also known as the FDIC, recommended increasing the size of insured bank deposits for certain account types, a move which would follow the recent collapse of three major financial institutions.
First Republic Bank imploded on Monday after Silicon Valley Bank and Signature Bank collapsed in early March; all three companies had a majority of clients with account balances well above the $250,000 threshold insured by the FDIC, prompting the government-backed corporation to secure insured and uninsured deposits at the two latter institutions to decrease the risk of bank runs at other firms. The FDIC issued a report on Monday which voiced support for “targeted coverage” such that business accounts can receive far higher insurance limits.
“Extending deposit insurance to business payment accounts may have relatively large financial stability benefits, with fewer costs to moral hazard relative to increasing the limit for all accounts,” the report said. “It is difficult for businesses to maintain payment accounts across multiple banks to obtain increased deposit insurance coverage. Payment accounts rarely involve weighing a risk-return tradeoff typical of investments that form the basis of desirable market discipline. Further, losses on business payment accounts are most likely to spill over to payroll and other businesses.”
The FDIC preferred a targeted coverage regime over a limited coverage regime, which maintains the current system of deposit insurance but does not “address the run risk associated with high concentrations of uninsured depositors, even with an increase to the deposit insurance limit,” as well as an unlimited coverage regime under which all account balances would be universally insured, a system that “effectively removes run risks but may have large effects on bank risk-taking” as banks have fewer incentives to manage risk.
Sen. Elizabeth Warren (D-MA) and Rep. Maxine Waters (D-CA) are among the lawmakers who have suggested in recent weeks that the $250,000 limit should be reexamined. Lawmakers have raised the deposit insurance threshold under the current limited coverage system: the FDIC only offered $2,500 of deposit insurance in 1934, a threshold which gradually increased to $100,000 in 1980 before reaching $250,000 after the Great Recession in 2008.
Any change to the current deposit regime must also protect the Deposit Insurance Fund, which the FDIC finances with bank fees and uses to cover insured deposits after the collapse of financial institutions. The fund lost $33 billion amid the failures of the three medium-sized banks.
First Republic Bank was acquired on Monday by JPMorgan Chase, which is already the largest bank in the United States and the largest bank in the world by market capitalization. Silicon Valley Bank was previously acquired by First Citizens Bank; the company purchased $72 billion of assets at a discount of $16.5 billion while $90 billion remained with the FDIC. New York Community Bancorp meanwhile acquired Signature Bank for more than $38 billion.
Officials at the Federal Reserve recently concluded that the turmoil in the financial system warrants a recession forecast for the end of the year, followed by a predicted recovery over the course of the subsequent two years. Policymakers also estimated that the historically low unemployment rate will rise toward the beginning of next year.