FDIC to raise insured deposit limit

The Federal Deposit Insurance Corp. (FDIC) has suggested that the risk of bank runs could be reduced if a proposal to increase deposit-insurance protection for businesses beyond the current $250,000 threshold is accepted. The report was issued following three recent bank failures that were triggered by classic bank runs, as skittish depositors withdrew their funds because of instability at the banks. The FDIC has recommended more flexibility to cover higher deposits on a “targeted” basis.

Raising the insurance limit for business accounts that pay for company operations such as payroll would support accounts that pose the most risk to financial stability, according to the FDIC. The agency is looking for ways to calm both depositors and markets following the third bank run this year. Silicon Valley Bank and Signature Bank both failed in March, and First Republic Bank, the second-largest failure in history, was seized by regulators on Monday, with JPMorgan Chase stepping up as a buyer.

The FDIC recommended that the decades-old limit be reviewed to allow for more flexibility to cover higher deposits on a “targeted” basis. The proposed change would acknowledge that the FDIC is looking for ways to calm depositors and markets as the agency deals with the third bank run this year.

As of December, more than 99% of US deposit accounts held less than $250,000, and so were automatically covered by existing FDIC insurance. However, the system remains subject to the sort of bank runs that brought down First Republic, despite a consortium of big lenders pooling $30bn in cash to stabilise the bank as recently as March. The FDIC is seeking additional powers to insure business accounts, saying technological advances hasten the speed of information, and depositors can quickly take their money elsewhere at the first sign of trouble.

Jaret Seiberg, an analyst with TD Cowen, said in a report to investors that raising the deposit insurance cap for businesses would benefit smaller lenders. He added that unlimited coverage on payroll accounts would be broadly positive for smaller regional and larger community banks, as they would be better able to compete with the mega banks for these deposits. However, the FDIC would need to increase its Deposit Insurance Fund, financed through fees on banks, significantly. As a result, many lenders would likely oppose expanding the fund, Seiberg said.