Why deposit insurance reform is a critical opportunity for Main Street

Al Drago/Bloomberg

During the collapse of Silicon Valley Bank and other large institutions in 2023, consumers, policymakers and community bankers like me learned that bank runs can now spread faster than ever. With current deposit insurance policy proving inadequate to quell fears about gaps in insurance coverage, particularly for small-business customers, bipartisan legislation supported by the administration is an important starting point for meaningful reforms that will support consumer confidence and stem the flight of deposits to large banks that benefit from implicit government guarantees.

In today's modern era of social media usage, misinformation can travel throughout the nation in real time. Depositor uncertainty at a single institution can quickly give way to depositor uncertainties within the broader financial system, even spreading to healthy banks with a loyal customer base.

Unfortunately, rumors on social media do little to differentiate the good from the bad or to explain that problems at one institution are isolated events. In fact, as we witnessed during 2023, irresponsible actors can deliberately spread misinformation on social media with the intent to sow fear about the health of banks and cause additional failures.

Deposit insurance is essential to preserving the strength of the nation's banking system, but it must provide adequate coverage to be effective. While the current standard maximum deposit insurance amount of $250,000 provides more than enough coverage for the vast majority of individuals, that limit is low for small-business accounts that process much larger amounts for employee payrolls and business operations. Without higher coverage, small-business customers may believe they should transfer their deposits to a "too big to fail" institution that is implicitly guaranteed by the government due to the systemic risks its failure would pose, rather than keeping their deposits in their preferred community bank. 

Deposit insurance

HFSC Chair Hill eyes wider scope in deposit insurance debate

House Financial Services Committee Chair French Hill, R-Ark., said he wants to consider a range of ideas on how to improve deposit insurance and other issues facing community banks beyond a Senate bill raising insurance for business accounts.

By Claire Williams

November 19

Fundamental reforms are needed to promote continued confidence among all bank customers, including small-business customers; to curb the nation's too big to fail guarantee; and to ensure Main Street community banks do not lose deposits to the largest institutions for no other reason than outdated insurance limits that were not designed to withstand social-media-fueled runs on institutions. 

Fortunately, Sens. Bill Hagerty and Angela Alsobrooks have introduced an essential piece of the needed policy response, which has the support of Treasury Secretary Scott Bessent. The bipartisan legislation would increase deposit insurance coverage specifically for non-interest bearing transaction accounts. These business accounts are generally used for payroll and operating expenses — the kinds of funds that rapidly fled several large regional banks in 2023, leading to their failures. The standard maximum deposit insurance amount of $250,000 for individual consumers would be unaffected. 

Equally important, this legislation would ensure Main Street community banks are not required to pay for the increase in deposit coverage for a 10-year transition period. This represents important bipartisan recognition of the unfair deposit insurance cost imbalances that favor the largest institutions, providing a critical exclusion that will ensure the FDIC does not have unlimited discretion to pass these costs onto community banks. And by requiring the FDIC to account for 100% of insured non-interest bearing transaction account deposits at the end of the 10-year period, it will avoid any sudden increase in deposit insurance fees on community banks following the transition. 

Raising deposit insurance limits for small-business accounts will bolster depositor confidence in a fairer and more competitively balanced banking system. And it will ensure small-business customers have continued access to community banking in local communities nationwide without questioning whether their deposits are insured and protected.