Leave FDIC insurance where it is and tax 'too big to fail' banks instead

Nathan Howard/Bloomberg

Some bankers apparently think the "c" in the FDIC on their front door means insurance "cooperative," where they dictate their own premiums; the underlying designated reserve ratio, or DRR; and even deposit insurance limits. Like the unwarranted $10 and $20 million proposals for community bank designated business accounts.

Contrary to the industry and even some mainstream media, the real "owners" of the FDIC "corporation," like corporate shareholders, are depositors, who as taxpayers ultimately back the FDIC when its fund turns negative. Like it did in 1991-1992 and 2009-2011.

The Treasury's Federal Financing Bank lent the FDIC $15 billion in 1992 and provided up to $500 billion of backstop borrowing authority in 2009, although the FDIC used prepaid premiums to cover its deficit. Separately, the FDIC borrowed nearly $250 billion from the Fed to resolve the three big 2023 failures.

Reality check: The FDIC was created to protect depositors not banks, because bad things happen when consumers stop trusting banks.

I learned this in the early 1950s watching my family desperately dismantle the basement of my grandfather's Detroit grocery store while an impatient demolition crew waited outside. In the walls, we found Mason jars stuffed with $100 bills. Several jars remain buried under Wayne State University's parking lot, where the grocery store once stood.

Why was my grandfather hiding cash in the basement? He had watched family members lose their life savings in one of the nearly 4,000 banks that didn't reopen after the March 1933 banking holiday. Three months later, the FDIC was created, but my grandfather never trusted another bank.

I began studying the FDIC in 1965, and they offered me a job as an economist in the early 1970s. I didn't accept, but as an FDIC nerd, I collected and read every FDIC publication possible, including an original hardbound version of the first FDIC Annual Report.

For those proposing indexing deposit insurance to inflation, know that the first permanent $5,000 deposit insurance limit in 1934, the original benchmark, equals about $121,000 today. Thus, halving the current $250,000 limit would still be more than double the original in current dollars.

The Fed's most recent 2022 Survey of Consumer Finances shows a median $8,000 transaction and $26,000 CD account balance. Respective balances for the wealthiest 10% were $128,000 and $68,000. The median small-business deposit balance in 2024 was $7,300 according to the JPMorganChase Institute.

Fewer than 1% of all bank accounts are above the $250,000 limit, so expanding it benefits one-percenters, who can easily get extended coverage up to $100 million through reciprocal deposit networks.

Banks can't go insolvent twice, so why should the FDIC's insurance fund?

That fund's DRR, originally set at 1.25%, was later expanded to a 1.15%-1.50% range, and ultimately to a 1.35% minimum with a 2% goal. The June 30, 2025, reserve ratio of just 1.36% should be increasing rather than being exposed to future decreases.

Imagine what FDIC examiners would tell a bank with reserves barely above the minimum level or a bank with 2% or less capital? Former Fed Chair Paul Volcker confirmed that some big banks during the 1980's Latin American Debt Crisis "let capital get down to less than 3%, maybe 2%."

Moral-hazard-conflicted banks and their lobbyists have been demanding higher insurance limits and lower DRRs and premiums since the early 1990s.

Trump administration

Travis Hill FDIC chair confirmation hearing: Live coverage

The Senate Banking Committee is slated to hear testimony from acting Federal Deposit Insurance Corp. Chair Travis Hill Thursday morning as he seeks to be confirmed to the role permanently.

By Claire Williams

October 30

I presented deposit insurance reform testimony from a depositor's perspective before the FDIC board in 1995 and 2000 and before Congress, also in 1995 and 2000. My recommendations fell on deaf ears, because Congress and the FDIC mostly listened to banks and their lobbyists.

The FDIC's fund wouldn't have gone negative in 2009-2011 during the great financial crisis had these five following depositor-focused recommendations I made in that testimony been adopted:

First, the DRR should be at least 1.50% rather than the 1.25% historic average then encouraged by the industry. I even identified an error in the 1980 Depository Institution Deregulation and Monetary Control Act documenting that the 1.25% average was actually 1.425%, closer to my 1.50% minimum. The 1.50% DRR should be the floor not the ceiling.

Second, there should be no cap on the DRR, allowing growth to 2% or more. Real insurance companies don't have caps. The FDIC confirmed its fund wouldn't have gone negative twice with a 2% DRR.

Third, there should never be any rebates, so-called FDIC "dividends." When was the last time your insurance company gave you a rebate?

Fourth, special risk deposit premiums in a 3-to-10-basis-point range should be assessed on banks with poor safety and soundness ratings, risky loans, rapid growth and nontraditional business plans. Drivers and homeowners with higher risk profiles pay more in the real world.

Fifth, the 25 or so too big to fail, or TBTF, banks should pay a special 3-to 8-basis point premium on assets, not deposits, for that privilege. We cannot eliminate TBTF, which has existed since 1984, but we can make TBTF banks pay for that competitive advantage. That was the first explicit TBTF premium proposal, but TBTF banks and their lobbyists ensured it went nowhere.

Bankers and administration cheerleaders using the Silicon Valley Bank failure to justify unwarranted deposit insurance limits should recall why it failed. It wasn't their huge uninsured deposit base but their failure to manage interest rate risk.  

Increasing taxpayer-backed insurance limits discourages, rather than encourages, effective risk management.

With the growing number of fintech, crypto, industrial loan company, and other nonbank barbarians at the banking gate, this is the worst possible time to consider increasing insurance limits.

The $10 to $20 million insurance proposal is not deregulation but an ill-conceived idea benefiting one-percenters and exposing taxpayers to the risk of the FDIC's fund going negative a third time.

Community bankers feeling disadvantaged by big banks should pursue my TBTF deposit premium proposal, call it a "bailout tax," rather than higher FDIC limits.

Meanwhile, if President Trump's version of capitalism means taking a 10% stake in Intel and other private ventures in return for government funding, he or a less business-friendly political environment may consider taking a stake in bailed-out TBTF banks or those requiring government intervention, perhaps resulting from expanded insurance limits.

Be careful what you wish for.