FDIC insurance reform plan sets cap too high, creates risk

With most well-intentioned proposals in Washington, the devil is always in the details. The recently proposed bill to raise the deposit insurance limit for non-interest-bearing accounts to $20 million from the current $250,000 limit is one more example.

On its face, proponents suggest that this measure is aimed at “small” and community banks because it applies only to institutions with less than $250 billion of assets, or roughly those institutions holding $240 billion more in assets than currently defined as “community banks” by federal regulators today and $150 billion more in assets than what is considered a “regional bank” by the same. Furthermore, the bill would ostensibly delay the cost to banks by having the FDIC phase it in over 10 years, although the increased coverage would be immediate. This means immediate risks to the FDIC and the broader financial system — or more akin to the buy now/pay later method of ensuring the safety and soundness of the banking sector.

Banks — not taxpayers — prefund the Deposit Insurance Fund through assessments to the FDIC so that the FDIC can absorb any losses that result from bank failures at some future date and make depositors whole up to insured amounts, without a hit to the U.S. Treasury. The buy now/pay later approach undermines this bank-funded safety net and poses undue risk to the financial system. If we encounter another crisis like we saw with Silicon Valley Bank during 2023 and banks fail, the costs of those failures will undoubtedly be higher too, because of $20 million worth of coverage. A similar failure today would invoke a steep premium and special assessment to FDIC insured banks that would make the SVB bailout look like a rounding error.

Accordingly, we are looking to Congress to take a holistic and measured approach to deposit insurance coverage that does not unduly burden the very community banks that have maintained safe and sound banking practices and kept the U.S. economy afloat for hundreds of years.

The $20 million figure put forward by proponents is larger than what most community banks would need to provide coverage to existing depositors. Even if we acknowledge that the limit needs to be updated, there must be a robust discussion among banks and policymakers of what that level should be. As of right now, there’s no justification for $20 million. While supporters argue this is about helping small businesses with their payroll accounts, such justification has not been noted among community bank depositors. Additionally, there is nothing limiting the proposed legislation to business accounts.

Further, the asset size threshold prescribed by the bill is too high. It is inconceivable that banks with asset sizes just below those considered global systemically important banks would require the same coverage as a $250 million-asset institution operating in a local market. Yet, the proposed bill covers institutions up to $250 billion in assets. As a point of comparison, Silicon Valley Bank had roughly $209 billion in assets at the time of its failure, invoking a systemic risk exception in 2023.

Under the subject proposal, there’s nothing to stop speculative investors, wealthy yacht owners or whomever else from moving funds at the 11th hour from an interest-bearing account to a non-interest-bearing one the second they see a negative headline that hints at trouble at their bank. Additionally, there’s no way to stop risky failing banks from offering incentives on other accounts to entice depositors into non-interest-bearing ones so that they can try to grow out of their problems. This is a threat to the entire system, whereby the surviving banks are left to pay the costs of the actions of reckless institutions the same way they did after SVB failed.

Raising further concern is the political cost of the proposal. There is no government benefit that doesn’t come with strings attached. The current thinking from supporters is that policymakers will benevolently enact a massive, permanent change to the deposit insurance system and banks will not be asked to pay more. But there is always a price for banks, and when political power dynamics shift, those strings become chains. Increased deposit insurance coverage could be used to justify further regulations around lending, account opening, fees and everything else a bank touches. Moreover, the process of passing a bill is notoriously messy, meaning that other problematic measures, including legislation to curb interchange fees, might be added during the legislative process.

Despite all these objections, Congress can and should still enact meaningful deposit insurance reform. In doing so, I strongly recommend that Congress takes a thoughtful and holistic approach to modernization rooted in data driven and data supported rationale for account balance limits, tied to an indicator that does not require an act of Congress to increase limits over time.

Congress can also mitigate community banker concerns by capping or waiving assessments, including special assessments, so that community banks operating below $10 billion in assets are statutorily exempt or otherwise protected from increased premiums to the Deposit Insurance Fund.

Meaningful reform should reduce the qualifying asset size threshold or, at a minimum, establish tiers so the nation’s smallest community banks are not penalized due to the actions of those that have already been deemed too big to fail by the regulators.

Finally, Congress should restore the ability of the FDIC board of directors to enact a Transaction Account Guarantee-like program without congressional approval to allay depositor concerns in times of crisis.

Through a careful and deliberate approach to addressing the need for modernization, without penalizing community banks, Congress can make meaningful changes in recognition of the unique role that community banks play in the financial system and local economies.