The Federal Deposit Insurance Corp. (FDIC) is proposing a change to ease the industry’s turmoil that has resulted in three bank failures in the past two months. The agency is recommending that US businesses be able to secure bank deposit insurance for accounts holding more than $250,000, a change to the current limit that’s been in place for decades. The FDIC is seeking more flexibility to cover higher deposits on a “targeted” basis, in order to shore up accounts that pose the greatest risk to financial stability. The proposal acknowledges the FDIC is looking for ways to calm both depositors and markets, as it has to deal with yet another bank run this year.
The FDIC’s proposal follows the failure of First Republic Bank, the second largest failure in history, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at Silicon Valley Bank and Signature Bank. These incidents have raised fundamental questions about the role of deposit insurance in the US banking system, says FDIC Chairman Martin J. Gruenberg.
In December 2020, FDIC insurance covered deposits in 99% of US banks that were less than $250,000. Bank runs are still conceivable, as we saw with First Republic. Customers withdrew $100 billion from First Republic Bank, much of it in the middle of March following the collapse of Silicon Valley Bank and Signature Bank. The news stunned investors, and the bank’s stock plunged over 50% the following day.
Regulators are exploring the possibility of deposit insurance for business accounts that specifically pay for company operations like payroll. This would be the most cost-effective way for regulators to meet their stability objectives, according to Gruenberg. However, offering greater deposit insurance to banks can also spur greater risk-taking as it encourages them to seek out higher returns. Technological advances have also made it easier for depositors to access information and to quickly transfer their funds to other institutions, making it easier for bank runs to occur.