Photo by Matthew G. Bisanz | CC BY-SA 3.0

The FDIC says it should be given the ability to insure some bank account balances above its standard $250,000 cap in order to preserve financial stability in the future.

The cap, which Congress has raised multiple times from the $2,500 level first set when the FDIC was created in 1933, applies to all accounts but in a statement issued Monday afternoon, FDIC Chairman Martin Gruenberg argued that it needs to be raised “significantly higher” for business payment accounts.

“The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system,” Gruenberg said.

While 99 percent of the nation’s bank accounts remain below the $250,000 threshold, a large chunk of the dollars on deposit at America’s banks are currently uninsured. The share peaked in 2021 at 47 percent, Gruenberg said, higher than at any time since 1949. On top of that, he said, uninsured deposits represent a significant share of the largest banks’ funding, creating the potential for bank runs that threaten financial stability – a risk made worse by the speed at which fears of a bank’s solvency now travel.

The run that brought on the collapse of Silicon Valley Bank was reportedly juiced by the tight connections between venture capitalists and between these investors and the companies they backed, many of which rushed to pull millions in deposits from SVB overnight.

Gruenberg’s statement accompanied a report analyzing three options: keeping the current uniform cap structure, providing unlimited coverage for all accounts or raising it in a “targeted” fashion to cover accounts businesses use to pay regular operating expenses like salaries or vendor invoices.

“While acknowledging that deposit insurance can create moral hazard by providing an incentive for banks to take on greater risk, the report underscores that regulation, supervision, and deposit insurance pricing are essential for helping the deposit insurance system meet its financial stability and depositor protection objectives while constraining moral hazard,” Gruenberg said.

The report and the statement do not represent a formal proposal to change the deposit insurance structure, but instead are intended to kick off “an informed public discussion” on whether and how the deposit insurance system should change in the wake of the March banking crisis, Gruenberg said.

In a press release announcing the report and Gruenberg’s statement, the FDIC said that some level of congressional action would be needed to implement any of three changes the report outlines, but added that some aspects could be implemented using the agency’s existing powers.

The current deposit insurance system doesn’t define what a business payment account is or isn’t, and the FDIC’s report acknowledges that setting up that structure would be core to the overhaul it describes. The report also raises ideas like interest rate limits on business payment accounts or specific curbs on withdrawals for accounts that don’t have higher levels of deposit insurance as ways to prevent businesses and banks from gaming any such system.

“In delineating accounts, it is important that large deposit accounts do not simultaneously offer insurance coverage, liquidity, and high yield,” the report states.