Earlier this month when Silicon Valley Bank And signature bank failed in rapid succession, federal regulators took the extraordinary measure of removing the Federal Deposit Insurance Corporation’s (FDIC) deposit insurance limit of $250,000 for these two institutions. Citing a “systemic risk exemption,” the move protected uninsured depositors — but only at those two banks. Without a more permanent change in policy, many depositors fear their money will not be guaranteed unless it is in a large, “systemically important” bank.
To restore confidence in the banking system and stem the dangerous outflow from state and local banks, Congress must act now and raise the FDIC insurance limit to $10 million. This threshold would provide meaningful protection for small and medium-sized businesses and ensure a solid base of deposits that are not vulnerable to bank runs.
Two of the most important policy goals of FDIC insurance are building confidence and stability in the banking system. Exception-based coverage undermines these goals. It signals to depositors that they could Get additional protection from a systemically important bank. As a result, larger depositors are moving their balances from regional and community banks to the largest national banks, further consolidating our financial system in the hands of a few institutional giants.
Business deposits are a primary source of funding for commercial banks. If the insurance limit is not raised, more commercial banks could fail, leading to a permanent transformation of the banking landscape – one that reduces competitiveness, hampers small business ability and constrains the availability of capital. As more deposits are shifted to the largest banks or out of the banking system altogether, the regional and community banks will have less liquidity available, causing irreparable harm to the economy.
A robust and diverse banking system is critical to American small businesses and the overall health of our economy. According to the federal reserve“Small business lending plays a larger role in the portfolios of small banks than in the portfolios of large institutions.” During the pandemic, community banks did 60% of all Paycheck Protection Program loans and 72% of loans to minority-owned companies. Increasing deposit insurance levels would allow companies to hold their deposits with regional and community banks and ensure those banks have the liquidity they need to lend to the small businesses that power our economy.
Requiring large depositors to move their money when they perceive risk can actually increase that risk and trigger a downward spiral of deposit outflows, as we saw at SVB and other regional banks this month. Expanded deposit insurance will give depositors more confidence in banks and make the banking system more resilient overall by reducing deposit volatility.
Some advocate unlimited deposit insurance, but that has its own pitfalls. Banks are strongest when they have a variety of funding sources. Concentrating a bank’s liquidity on just a few very large deposits could result in banks over-relying on these accounts. A meaningful cap is important for managing deposit concentration risk.
Happily, some politicians have already indicated their intention to consider raising the FDIC insurance limit, which requires an act of Congress. While the exact amount is up for debate, there is no doubt that this is the right move.
During the 2008 financial crisis, the FDIC deposit insurance limit was raised to $250,000 with the idea that individuals and companies with deposits above that amount would be more sophisticated with investments and their ability to manage risk.
However, we cannot reasonably require small businesses to properly underwrite individual banks and assess system-level risks – especially when bankers, investors and regulators were unable to do so themselves during the last two crises. Furthermore, $250,000 as a commercial deposit limit is almost meaningless and barely covers the working capital for many small businesses, let alone a medium-sized business or a large corporation.
Leaders must act now to boost confidence in the banking system. This will strengthen regional and local banks and limit the systemic risk of fewer and larger too big to fail megabanks, give depositors clearer expectations and ensure money circulates, especially for the small businesses that keep our economy alive receive.
Randell Leach is CEO of Beneficial State Bank, a state-licensed, state-insured, for-profit bank majority beneficial owner of the not-for-profit Beneficial State Foundation, which itself is continually managed in the public interest. The Beneficial State Bank is one of the world’s leading Certified B Corporations.
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