The Federal Deposit Insurance Corp. (FDIC) has proven to be a vital form of protection, as we saw earlier this year. In March, Silicon Valley Bank failed, followed quickly by Signature Bank. The FDIC took over both banks amid growing fear of further bank failures.
Fortunately, FDIC deposit insurance kicked in for account holders at both banks. Other big regional banks continue to struggle, but industry-wide failures haven’t yet materialized. (For more about this issue, see Kiplinger.com's article Deeper Regional Banking Crisis Unlikely after Triple Failure: Kiplinger Economic Forecasts.)
So far, the FDIC has done its job, and FDIC historical data shows it has always been up to the challenge. However, certain aspects of the recent failures have some banking experts and policymakers asking whether it’s time to raise the deposit insurance limit.
Problems with the current FDIC deposit insurance limit
The current FDIC deposit insurance limit is “$250,000 per depositor, per FDIC-insured bank, per ownership category.” But some critics argue the $250,000 limit is no longer high enough. Even the FDIC has called for an increase.
The reasoning behind a higher limit is sound. The current limit:
- Fails to keep pace with inflation. The $250,000 limit has not been adjusted since 2008. But inflation has increased dramatically since then: 2008’s $250,000 is worth over $350,000 today.
- Leaves some consumers unprotected. It’s increasingly common for individual Americans to have over $250,000 in a single bank account. If you look at the amount of home you can get for a quarter million, you realize it’s no longer rich-people money.
- Fails to protect businesses. Even small businesses have considerably higher budgets than the typical individual or family, necessitating considerably higher bank balances. To cover receivables and payroll, they must often keep these balances in a single bank account. Yet, there’s no special class of protection insuring business accounts for realistic amounts. That was the case for many businesses using Silicon Valley Bank. Fortunately, the FDIC stepped up to cover overages.
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Problems with raising the limit
Some policymakers and economists have questioned the need to increase the limit. The issue remains a subject of ongoing debate. Those who oppose raising the limit make several arguments against it:
- It would disproportionately benefit wealthier depositors. Raising the FDIC limit would primarily benefit those with larger deposits, who tend to be wealthier individuals and businesses.
- Accounts with higher limits are already available to those who need them. If you want to deposit more than $250,000 in a bank account and have insurance on the whole amount, you can. The FDIC limit is just a minimum. There are banks that provide insurance for larger balances.
- Costs more for little return. Increasing the limit would require the FDIC to raise premiums on banks, which they would ultimately pass on to consumers in the form of higher fees or lower interest rates or rewards. But most individuals have less than $250,000 in deposits, so the bank would be paying extra to insure money they don’t have on deposit.
- Increases government intervention in the banking system. Some consumers eschew government intervention in our monetary system. Raising the limit doesn’t get rid of the existing oversight, but it would worsen its effects.
- May not address underlying banking system issues. Raising the FDIC limit is unlikely to address the underlying issues in the banking system that could contribute to bank failures. For example, if banks are engaging in risky behavior or investing in risky assets, simply increasing the FDIC limit isn’t enough to prevent future failures.
The future of the FDIC deposit insurance limit
I can’t say when the limit may increase, but history shows it always does at some point. As of now, it’s important to watch a handful of indicators:
- Economic conditions. In times of economic uncertainty or instability, even policymakers who would typically oppose such measures are more inclined to take pro-consumer stances.
- Banking industry outlook. The limit is likely to stay the same unless negative industry conditions favor a change. The question is whether the recent bank failures are a bellwether of things to come or isolated incidents.
- Political climate. In some ways, a limit increase is ultimately a political decision. Without a consensus, no increase can happen.
If we see more bank failures, that could push the government to raise the limit. The opinions of FDIC experts can also impact when and by how much.
For now, it seems likely there will be some debate around increasing other oversight or regulations first, such as expanding rules that currently only apply to larger banks to somewhat smaller ones. Failing that, more bank implosions seem likely, which could very well push policymakers to increase the FDIC deposit insurance limit.
