The $25 Million FDIC Deposit Insurance Case

Illustration: Aida Amer/Axios

Former Treasury Secretary Steven Mnuchin said this week that the FDIC’s insurance cap should be raised “to $10 million or $25 million” in order to prevent regional banks from being disadvantaged relative to large money banks.

Why is this important: Businesses often need to keep more than $250,000 on deposit in order to comfortably fund day-to-day operations, including payroll. These companies are not able to assess the solvency of banks.

Rollback: Former FDIC Chairperson Sheila Bair took control of Wachovia, the fourth largest bank in the United States, in September 2008. Eventually it was sold to Wells Fargo, which outbid Citigroup for the bank.

  • The problem in Wachovia was a $5 billion bank run, led by large uninsured depositors. If these deposits had been insured, said Bair the following month, it “definitely would have made a difference”.
  • To solve this problem, Bair introduced the Transaction Account Guarantee Program in October 2008. The plan, which did not require congressional legislation, effectively ensured all deposits in corporate transaction accounts; it expired at the end of 2012.

The big picture: The rapid rise in long-term interest rates has worried corporate depositors, with the exception of very large banks – those officially judge too big to fail.

  • By BloombergGarry Tan, president of Y Combinator, wrote in a message to his peers, “Whenever you hear of credit issues at a bank, and it can be deemed credible, you should take it seriously.”
  • The catch: Just about any bankeven JP Morganmay be subject to credit rumors in the current interest rate environment.

What they say : “We have a huge systemic crisis,” former Comptroller of the Currency Gene Ludwig told Axios.

  • “If you’re a merchant bank, almost by definition you’re going to have a lot of uninsured deposits.”

  • “We need to do something about deposit insurance. The idea that deposit insurance creates moral hazard is one of the biggest canards in the world.”
  • “Some medium-sized banks are in very precarious situations,” adds Michele Alt, co-founder of Klaros. “Over the past few weeks, depositors have moved about $550 billion from smaller banks to larger institutions and money market funds.”

Between the lines: The 2010 Dodd-Frank banking reforms made it harder for regulators like the FDIC to unilaterally guarantee deposits as they did in 2008.

  • At the time, no one had already seen a bank run almost as fast or as dangerously as the one that hit Silicon Valley Bank.

The bottom line: Government guarantees are effective in preventing deposit runs. But for the current $250,000 limit to be raised, Congress would have to pass new legislation.

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