Lawmakers and federal officials are debating whether to boost deposit insurance as a way to rebuild confidence in the U.S. banking system.

The discussions center around whether to raise or temporarily waive the $250,000 insurance limit for bank deposits enforced by the Federal Deposit Insurance Corporation (FDIC). 

Since the collapse of Silicon Valley Bank (SVB) earlier this month, wealthy depositors have been moving their uninsured deposits from midsize banks to the largest institutions, prompting fears that some regional banks could be the next to fall.

Midsize banks are reportedly lobbying federal officials to guarantee all bank deposits over the next two years to stop the outflows. 

Treasury Secretary Janet Yellen said Tuesday that regulators will continue to protect all deposits when a bank run poses a systemic risk, as they did with SVB and Signature Bank.

She added that the protection could extend to smaller banks — a reversal from her previous remarks. 

“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Yellen said during a speech before the American Bankers Association.  

Broader changes to deposit insurance outside of the FDIC’s systemic risk exception would almost certainly require approval from Congress, experts said. More robust insurance would also require banks to pay higher fees.

Treasury Secretary Janet Yellen
Treasury Secretary Janet Yellen arrives for a House Ways and Means Committee hearing to discuss the president’s fiscal 2024 budget on Friday, March 10, 2023.

Congress nowhere near agreement on insurance  

Sen. Elizabeth Warren (D-Mass.) said Sunday that the FDIC insurance cap could be raised into the millions to ensure that employers get their money back when a bank goes under, while other Democrats are considering less aggressive measures. 

Congress last raised the FDIC cap from $100,000 to $250,000 following the 2008 financial crisis. But Republicans largely don’t appear eager to raise the cap or temporarily guarantee deposits.

The House Freedom Caucus said Monday that it would oppose any universal guarantee on bank deposits, arguing that the move “encourages future irresponsible behavior to be paid for by those not involved who followed the rules.”

At their annual retreat, top Republicans cautioned against immediate action on deposit insurance and cast blame on regulators for failing to prevent the SVB collapse. Speaker Kevin McCarthy (R-Calif.) said that California’s top bank supervisor should testify before Congress. 

“We don’t need more statutes or regulations. We need better and more active supervision,” Rep. French Hill (R-Ark.), vice chairman of the House Financial Services Committee, told reporters Monday.

Rep. Blaine Luetkemeyer (R-Mo.), a senior member of the committee, said that guaranteeing all deposits for 30 to 60 days could be an option to “calm the fears of these deposits leaking out” but cautioned that Congress needs time to assess the situation before taking action.

Bloomberg News reported that regulators are looking into ways to temporarily expand insurance to all bank deposits without the need for Congress.

“I think it’s risky for regulators to kind of completely bypass Congress when lawmakers have said they want to have a say in this matter,” said Ben Koltun, research director at Beacon Policy Advisors.

Sen. Elizabeth Warren (D-Mass.)
Sen. Elizabeth Warren (D-Mass.) arrives to the Senate Chamber for a vote regarding a nomination on Thursday, December 15, 2022.

Unlimited guarantees draw criticism 

Former FDIC Chairwoman Sheila Bair said Tuesday that Congress should consider temporarily providing guarantees for deposits in transaction accounts used by employers to pay their workers — a move that some Democrats are considering. 

But Bair said it would be an “overreaction” to insure all bank deposits.

“Unlimited insurance would be very expensive to do. It would be assessed on the banking system, backstopped by taxpayers, and would primarily help very, very wealthy people,” Bair said on Washington Post Live. 

Small community banks — defined as banks with $10 billion or less in assets — have spoken out against paying more to cover the failure of larger banks such as SVB.  

“If the FDIC decides to provide unlimited deposit insurance for some institutions, even on a limited basis, they cannot discriminate and leave others out, particularly those that have been operating on a safe and sound basis, such as the nation’s community banks,” said Anne Balcer, chief of government relations and public policy at the Independent Community Bankers of America (ICBA). 

Cam Fine, former CEO of the ICBA, noted that only around 10 percent of deposits in community banks are over the $250,000 limit, compared to roughly 90 percent for SVB. 

He said that while midsize regional banks are suffering from huge outflows due to their large uninsured deposit rates, many community banks are actually seeing new deposits.

“They’re not being deluged with phone calls from nervous customers. It’s business as usual down on Main Street, and I’ve heard that over and over,” Fine told The Hill. 

A branch of Signature Bank is photographed, late Sunday, March 12, 2023, in New York. Regulators announced that the New York-based bank had failed and was being seized. At more than $110 billion in assets, Signature Bank is the third-largest bank failure in U.S. history. Signature’s failure comes just days after the failure of Silicon Valley Bank. (AP Photo/Bobby Caina Calvan)

Regional banks under pressure 

San Francisco-based regional lender First Republic Bank has seen its stock drop 86 percent over the last two weeks as wealthy depositors pulled their funds. 

Investors are eyeing the bank’s 68 percent uninsured deposit rate and its large investments in long-term treasury bonds that lost value after the Federal Reserve hiked interest rates. First Republic is reportedly seeking more funding, even after 11 large U.S. banks deposited $30 billion into the bank. 

Other regional banks, such as Cincinnati’s Fifth Third Bank, have also seen a stock price decline before recovering some of the losses on Tuesday.

The downfall of regional banks would be particularly harmful for numerous small businesses that rely on them for funding. 

Goldman Sachs last week raised the chance of a recession to 35 percent and lowered its 2023 economic growth forecast by 0.3 percent, citing “increased near-term uncertainty around the economic effects of small bank stress.” 

“These banks are heavily engaged in traditional banking services that provide vital credit and financial support to families and small businesses. They also increase competition in the banking sector, and often have specialized knowledge and expertise in the communities they invest in,” Yellen said Tuesday.