Today, a coalition of center-right organizations sent a letter to the Federal Deposit Insurance Corporation (FDIC) in response to a Request for Information (RFI) regarding deposits. The comment letters primarily discuss why efforts to raise the federal deposit insurance threshold are wrong.
You can read the full letter here.
The letter argues why Congress should not raise deposit insurance thresholds for corporate accounts.
It is not beneficial to increase deposit insurance for corporate accounts beyond $250,000. Most small business accounts are already covered by the current deposit insurance framework. Less than 1% of bank accounts hold more than $250,000. The survey of 600,000 small businesses found that the median bank balance was $12,100, well below the current threshold of $250,000. Additionally, the median savings account balance for Americans is approximately $5,300, while the median savings account balances for Black and Hispanic Americans are approximately $1,500 and $1,900, respectively. The new expansion of coverage for corporate accounts will only benefit the wealthy.
The FDIC has left corporate account coverage unlimited, but footnote 137 of the report suggests the cap could be $2.5 million. But such restrictions cannot stop it from running. Footnote 129 of the FDIC report acknowledges that even if the deposit insurance limit had been $2.5 million when Silicon Valley Bank (SVB) failed, it would not have made much of a difference and the run would still have occurred. are. This defeats the purpose of proposing a target increase in deposit insurance limits. It also proves that raising the limit only benefits the wealthiest Americans.
Offering unlimited deposit insurance is also not a start. The letter explains:
Providing unlimited coverage also raises serious moral hazard concerns. According to one paper, “unlimited deposit insurance increases moral hazard and poses a threat to the country’s long-term financial stability.” History has shown that unlimited deposit insurance increases the likelihood of banking crises. Masu. ” This damning proposal would impose insurmountable assessments on banks that pay into the Deposit Insurance Fund (DIF), but would ultimately result in more expensive checking accounts, higher credit card interest rates, and unused savings. Consumers will pay in the form of a reduction in their credit limit. In effect, banking becomes much more expensive and credit harder to access for consumers.
The increase in deposit insurance thresholds also entails additional regulation of the banking sector.
Expanding deposit insurance will make the banking sector even more dependent on the federal government. If deposits were fully insured, banks could be more tightly regulated and function more like government-backed corporations like Fannie Mae or Freddie Mac. Fully insured deposits would give the government the power to both decide which industries banks should prioritize and to manipulate lending rates. This tremendous expansion of government power could put the U.S. banking system on the path to “de facto nationalization.”
Raising deposit insurance limits would also make depositors more reliant on insurance as a safety net. This is a classic example of moral hazard.
In economics, the term moral hazard “refers to the tendency for insurance against loss to reduce the incentive to prevent or minimize the cost of loss.”
The Fed acknowledged that providing insurance to all depositors at SVB and Signature Bank exacerbated moral hazard. According to the General Accounting Office’s (GAO) preliminary report on bank failures, Fed staff “expressed concerns about worsening moral hazard and the potential for weakening of market discipline at many depository institutions.” Additionally, GAO stated in a 2010 report that regulators’ use of the systemic risk exception “could reduce incentives to properly manage risks if market participants come to expect similar emergency measures in the future.” He pointed out that this shows that there is a gender. The 2010 report also stated that expanding deposit insurance “could reduce the incentive for newly protected large depositors to monitor banks, allowing banks to engage in riskier activities.” “There is a possibility,” he said. GAO was incredibly forward-thinking. If depositors know that the government will guarantee their deposits, they may “ignore the bank’s creditworthiness,” potentially contributing to moral hazard.
The letter concludes with:
Increasing deposit insurance limits is unnecessary and unwise. Private sector solutions already exist to help businesses maximize coverage without increasing moral hazard or imposing new regulations on banks. We are concerned that the FDIC’s focus on areas best left to Congress will distract it from its existing responsibilities. The banks that collapsed last year were due to serious mismanagement, and regulators did not act on the wealth of information they had before them. No new data requirements or laws increasing deposit insurance limits are needed. Regulators need to focus on making appropriate use of existing powers.
