Higher FDIC Limits Could Protect More Funds in Bank Failures

In a rare moment of bipartisan agreement in Washington, D.C., Senator Elizabeth Warren, a Democrat from Massachusetts known for her criticism of the banking industry, and Treasury Secretary Scott Bessent are joining forces to propose a significant increase in the coverage provided by the Federal Deposit Insurance Corporation (FDIC) for customers’ bank deposits.

One of the bipartisan proposals, known as the Main Street Depositor Protection Act, would raise the deposit insurance coverage to up to $10 million per depositor for non-interest-bearing transaction accounts. Another proposal suggests increasing the coverage to $20 million, but only for business checking accounts at banks with assets of $250 billion or less.

This proposed increase is significant, considering that the current FDIC insurance covers customers up to $250,000 per depositor, per ownership category, per bank in the event of a bank failure.

“I would say it’s a bit overdue,” comments Alexander Yokum, an equity research analyst at CFRA, emphasizing that the limit has not been adjusted for inflation despite the substantial growth in the aggregate value of bank deposits. He points out that while more than 99% of bank accounts hold less than $250,000, approximately half of bank deposits, totaling about $7 trillion, are currently not covered by FDIC insurance.

There is historical precedent for increasing the limit, as it was raised by $150,000 in 2008. Market observers like Luke Lloyd, president and CEO of Lloyd Financial Group, believe that an update is necessary to reflect today’s financial realities.

Small and medium-sized banks argue that expanding deposit insurance would help them retain customers during times of instability, such as the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank in 2023. The Independent Community Bankers of America has expressed support for the Main Street Depositor Protection Act, highlighting the benefits it would bring to small banks and their customers.

While a previous initiative to raise the cap following the 2023 bank failures did not progress, the current push seems to have gained momentum. Secretary Bessent’s endorsement is seen as a positive development, signaling support from the executive branch for the proposed changes.

During a Federal Reserve community banking conference, Bessent emphasized the goal of “leveling the playing field” for small banks, which are often perceived as riskier compared to larger institutions.

Chris Nichols, director of capital markets at SouthState Bank, believes that a higher FDIC limit would not only benefit bank customers but also safeguard the community banking environment in the U.S., which plays a critical role in supporting local economies.

Moreover, increasing the FDIC coverage could lead to more choices for customers and potentially slow down the consolidation trend in the banking sector, where the number of small banks has declined by 45% over the past 15 years.

While the average American may not have close to $250,000 in their bank account, Lloyd argues that raising the FDIC limit would still offer indirect advantages. He explains that maintaining capital in local communities through increased FDIC coverage is essential for small business lending and economic growth.

Despite bipartisan support, the proposal faces opposition from major banks. Critics argue that higher deposit limits would disproportionately impact large banks, potentially leading to increased costs for customers. There are concerns about moral hazard and the possibility of banks taking greater risks with customers’ funds if the insurance limits are raised.

Advocates of a higher limit contend that big banks already benefit from implicit government support during times of crisis, as seen in the 2023 withdrawals from smaller banks to larger institutions. While there are apprehensions about potential fee hikes and service reductions by banks to offset higher FDIC premiums, supporters believe that increased coverage could enhance competition and customer choice.

Yokum acknowledges the likelihood of costs being passed on to customers by banks, especially larger ones, but also highlights the potential benefits for smaller banks in terms of competitiveness and improved services.