FDIC could insure all deposits

The Federal Deposit Insurance Corp. (FDIC) has been warned that it could face a $23bn hit to its deposit insurance fund (DIF) following the failures of Silicon Valley Bank and Signature Bank. The FDIC is required by law to hold the equivalent of 1.35% of all insured deposits in its DIF, meaning it has to keep $128bn on hand. To cover the loss, the regulator will increase the assessment fees it collects from the biggest banks. However, if the deposit insurance limit is raised to include all deposits, which is being considered by Congress, the fund could require an increase of over 84%.

While the DIF is not the only FDIC tool for backing up deposits, if the fund goes down to zero, the regulator may borrow from the US Treasury. Dodd-Frank means that the FDIC is required to charge systemically important banks, such as JPMorgan Chase, Bank of America and Wells Fargo, more on their assessment fees to top up the DIF. However, if the deposit insurance limit is raised, most of the increase in fees would land on the balance sheets of the biggest banks, rather than community banks.

The FDIC’s previous increase of banks’ contributions by 0.02 percentage points in 2019 led to opposition from banking associations. If Congress has to legislate the deposit insurance increase, trade groups may be more successful in resisting the proposed changes. However, it is argued that the deposit insurance increase is needed to make sure the FDIC can guarantee customers that they will not lose their deposits in the event of a bank failure, without resorting to using taxpayers’ money.

It is worth noting that the FDIC is predicting a $23bn hit, which is just a projection and may not necessarily reflect reality. However, if the projection is accurate, the consequences could be significant. The FDIC would need to find a way to top up the DIF to ensure that it can meet its obligations to depositors, and as the article notes, this is likely to require increased fees for banks. It remains to be seen whether the proposed deposit insurance limit increase will gain traction, but it is clear that the FDIC faces a significant challenge in maintaining the DIF in the face of potential bank failures.