WASHINGTON — The Federal Deposit Insurance Corporation recommended Monday that Congress consider expanding its regulatory powers to back some deposits so it can prevent bank runs.
The proposal came on the same day that the FDIC orchestrated First Republic Bank’s seizure and sale to JP Morgan and, after weeks of racing over Silicon Valley Bank, helped seed the meltdown.
Currently, the FDIC only insures bank deposits up to $250,000. This has left banks with a large share of uninsured deposits – particularly small and medium-sized banks – vulnerable to an outflow. The FDIC estimates that as of the end of last year, banks held $7.7 trillion in uninsured deposits, about 43 percent of all deposits in the United States.
“The report highlights that while the vast majority of deposit accounts remain below the deposit insurance limit, growth in uninsured deposits has increased the exposure of the banking system to banking threats,” FDIC Chairman Martin Gruenberg said in an accompanying statement. “. the report. “Large concentrations of uninsured deposits increase the likelihood of bank outflows and could threaten financial stability.”
Concerns about the stability of the banking system have led to an exodus of deposits from smaller regional banks to larger ones in recent weeks, as nervous customers shift their money to banks seen as “too big to fail”.
Some members of Congress have been looking for ways to boost deposit caps, at least temporarily, in an effort to prevent depositors from withdrawing their money from the smaller institutions that have been at the center of recent banking turmoil.
FDIC officials admitted Monday that the banking operations took them by surprise. As part of a review of what happened, the regulator was looking at ways to improve the system. Its report considered the feasibility of raising the current insurance cap; expanding it so that deposit insurance is unlimited; and creating a more targeted approach that would provide higher levels of deposit insurance for business accounts used in payroll processing.
The FDIC has expressed concerns that a large-scale expansion of deposit insurance could create “moral hazard” problems, meaning that banks would be protected from the consequences of making risky investments. I preferred to provide more protection for business payable accounts because these funds are generally used to pay employees rather than investments.
“Increasing coverage for large deposit accounts with greater demand for liquidity would reduce or eliminate the need for depositors of these accounts to withdraw their funds out of fear for the safety of their deposits and for the sake of their continued operations,” the FDIC said in its report. “This will have benefits for financial stability.”
The regulator acknowledged that such a system could bring new complexity, and that officials would have to work out how to differentiate between different account types and prevent investors from finding ways to game the system to gain greater protection.
During the 2008 financial crisis and the 2020 pandemic recession, lawmakers authorized a temporary guarantee program for business accounts that was similar to what the FDIC proposed on Monday.
The FDIC has not recommended how high the new insurance threshold should be, and officials have said legislation from Congress would be required to change the existing system.
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