In light of recent statements made by former Treasury Secretary Steven Mnuchin, it is clear that the Federal Deposit Insurance Corporation (FDIC) insurance cap needs to be raised to either $10 million or $25 million in order to ensure that smaller money-center banks are not put at a competitive disadvantage in comparison to larger regional banks. Given the recent sharp increase in long-term interest rates as well as the concerns of corporate depositors regarding the creditworthiness of banks, this call for an increase in the FDIC insurance cap comes at an opportune time.
Since the beginning of the Great Depression, the maximum amount that a person can be insured for by the FDIC has been capped at $250,000. This ensures that customers have peace of mind knowing that their deposits, up to a maximum of $250,000 per account, are protected by the FDIC in the event that the bank fails. This limit may be adequate for individuals and smaller businesses, but it is frequently insufficient for larger corporations, which typically require much more than $250,000 to be kept on deposit in order to fund their day-to-day operations, which may include paying employees. As a consequence of this, a great number of these companies are compelled to disperse their deposits across a number of different banks, which can be both time-consuming and expensive.
When it comes to deposit insurance, one of the primary concerns of businesses is the creditworthiness of financial institutions like banks. However, smaller regional banks do not receive the same level of support from the government as their larger counterparts, which are considered to be “too big to fail.” This has the potential to make depositors anxious, especially during periods of economic unpredictability. In point of fact, according to the co-founder of Klaros, Michele Alt, depositors have moved an estimated $550 billion out of smaller financial institutions and into larger institutions as well as money market funds over the past few weeks.
The existing limit on FDIC insurance is problematic due to the fact that it does not take into account the requirements of more substantial businesses. This is especially important in the current interest-rate environment, where even major financial institutions like JPMorgan can be the subject of rumors regarding their solvency. According to a message that was sent out by the president of Y Combinator to other business leaders, Garry Tan, “Anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously.”
Sheila Bair, who had previously served as chairwoman of the FDIC, came up with the idea for the Transaction Account Guarantee Program in October of 2008. In the case of Wachovia, the fourth-largest bank in the United States, the problem of uninsured deposits was effectively resolved through the implementation of the plan, which guaranteed all deposits in corporate transaction accounts. Nevertheless, this program was no longer available after the year 2012 came to a close.
For Congress to be able to pass new legislation that would allow for an increase in the FDIC insurance cap, click here. This has become more difficult as a result of the banking reforms that were implemented by the Dodd-Frank Act in 2010. These reforms made it more difficult for regulators such as the FDIC to unilaterally guarantee deposits in the same manner that they did in 2008. Despite this, many industry professionals are of the opinion that the FDIC insurance limit should be raised in order to forestall the occurrence of a systemic crisis.
Gene Ludwig, who served as the former Comptroller of the Currency, is quoted as saying, “We’ve got a huge systemic crisis…If you’re a business bank, almost by definition you’re going to have a lot of uninsured deposits.” Ludwig also contends that the notion that deposit insurance creates moral hazard is one of the largest canards in the world. The fact of the matter is that deposit insurance is required in order to forestall runs on deposits and guarantee the continuity of the banking system.
In conclusion, there is no better time than the present to advocate for an increase in the FDIC insurance cap. For larger corporations that need to keep more than $250,000 on deposit to fund their day-to-day operations, the current limit of $250,000 is insufficient. Furthermore, in the current interest-rate environment, even large banks can be the subject of rumors regarding their solvency, which can cause nervousness among depositors. An increase in the FDIC insurance cap would help to address these concerns and prevent a crisis that would affect the entire financial system. In spite of the fact that Congress would have to approve brand new legislation in order for the FDIC insurance cap to be raised, a significant number of industry professionals are of the opinion that doing so is essential in order to maintain the integrity of the banking system. Since it was implemented in 2008, the Transaction Account Guarantee Program was successful in addressing the issue of uninsured deposits; however, the program has since been discontinued. When it comes to deposit insurance, it is essential for lawmakers to take into account the requirements of larger corporations and to take measures to avert the possibility of a crisis.