FDIC Says Insurance For Deposits Could Change

In light of the recent failure of three large financial institutions, the Federal Deposit Insurance Corporation (FDIC) has proposed raising the maximum amount that may be deposited into a bank account and fully insured.

After Silicon Valley Bank’s and Signature Bank’s failures in early March, First Republic Bank failed on Monday. All three banks had many customers with balances above the $250,000 threshold for FDIC insurance, prompting the government-backed corporation to protect insured and uninsured deposits at the two latter institutions to prevent bank runs. 

Monday’s report from the FDIC expressed support for “targeted coverage,” whereby business accounts are eligible for much greater insurance limits.

The study argues that expanding deposit protection to business payment accounts may have relatively significant advantages for financial stability with smaller costs to moral hazard than lifting the ceiling on all accounts. 

It’s inconvenient for companies to spread their money to several banks to get more deposit insurance. In contrast to the assets that underpin the beneficial market discipline, managing a payment account seldom entails considering the risk-return tradeoff. 

Furthermore, payroll and other businesses are highly vulnerable to losses on business payment accounts.

The FDIC utilizes the Deposit Insurance Fund, which is funded by bank fees and used to cover insured deposits in the event of the failure of a financial institution; therefore, any change to the present deposit system must also safeguard this fund. When these three medium-sized banks failed, the fund lost $33 billion.

On Monday, JPMorgan Chase purchased First Republic Bank, making it the biggest bank in the United States and the world in terms of market value.

In light of recent market volatility, Federal Reserve officials have anticipated a recession by year’s end, with an eventual recovery over the next two years.