F.D.I.C. Proposes Broadening Bank Insurance for Businesses

The recommendations followed concerns that fueled a run on several banks.

The front of a building with the words Federal Deposit Insurance Corporation.

The Federal Deposit Insurance Corporation recommended that Congress consider expanding the banking regulator’s power to backstop certain deposits to prevent bank runs.Credit...Al Drago for The New York Times

By Alan Rappeport

May 1, 2023 3:34 p.m. ET

WASHINGTON — The Federal Deposit Insurance Corporation on Monday recommended that Congress consider expanding its regulatory powers to backstop certain deposits so that it could prevent bank runs.

The proposal came the same day the F.D.I.C. orchestrated the seizure and sale of First Republic Bank to J.P. Morgan, and weeks after a run on Silicon Valley Bank helped sow its collapse.

Right now, the F.D.I.C. insures bank deposits only up to $250,000. That has left banks that have a large share of uninsured deposits — particularly small- and midsize banks — vulnerable to runs. The F.D.I.C. estimates that as of the end of last year banks held $7.7 trillion of uninsured deposits, about 43 percent of total deposits in the United States.

“The report highlights that while the overwhelming majority of deposit accounts remain below the deposit insurance limit, growth in uninsured deposits has increased the exposure of the banking system to bank runs,” Martin Gruenberg, the chairman of the F.D.I.C., said in a statement accompanying the report. “Large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability.”

Fears over the stability of the banking system have led to an exodus of deposits from smaller regional banks to larger banks in recent weeks, as nervous customers moved their money to banks that are seen as “too big to fail.”

Some members of Congress have been looking for ways to boost the deposit cap, at least temporarily, in an effort to stop depositors from pulling their money out of smaller institutions that have been at the center of recent bank turmoil.

F.D.I.C. officials acknowledged on Monday that those bank runs caught them by surprise. As part of a review into what took place, the regulator has been studying ways to improve the system. Its report looked at the viability of raising the existing insurance cap; expanding it so that deposit insurance is unlimited; and creating a more targeted approach that would provide higher levels of deposit insurance to business accounts that are used for payroll processing.

The F.D.I.C. expressed concerns that broadly expanding deposit insurance could create “moral hazard” problems, that is, banks would be shielded from the consequences of making risky investments. It favored offering more protection to business payment accounts because that money is generally used for paying employees rather than investments.

“Increasing coverage to large deposit accounts with the most demand for liquidity would reduce or eliminate the need for depositors of such accounts to withdraw their funds out of fear for the safety of their deposits and for the continuity of their operations,” the F.D.I.C. said in its report. “This would have benefits for financial stability.”

The regulator acknowledged that such a system could bring new complexity, and that officials would have to determine how to distinguish between the different kinds of accounts and prevent investors from finding ways to game the system to have greater protection.

During the 2008 financial crisis and the pandemic recession of 2020, lawmakers allowed for a temporary guarantee program for business accounts that was similar to what the F.D.I.C. proposed on Monday.

The F.D.I.C. did not recommend how high a new insurance threshold should be set, and officials said that legislation from Congress would be required to change the current system.

Alan Rappeport is an economic policy reporter, based in Washington. He covers the Treasury Department and writes about taxes, trade and fiscal matters. He previously worked for The Financial Times and The Economist.