Americans for Tax Reform opposes legislation introduced Friday by Sen. Hagerty (R-Tenn.) and Sen. Alsobooks (D-Md.) that would substantially raise the Federal Deposit Insurance Corporation’s (FDIC) coverage limit. This proposal will result in higher borrowing costs, reduced lending, and an increase in taxpayer liability.
The bill, according to reporting from Politico, would raise FDIC insurance on business checking accounts from $250,000 to $10 million.
Similar proposals have been floated this Congress by Democrat lawmakers aiming to increase the government’s regulatory reach over the financial sector, by using Silicon Valley Bank’s collapse two years ago as a pretext.
Proponents lobbying for increased deposit insurance coverage have found allies in the likes of Maxine Waters (D-Ca.) and Elizabeth Warren (D-Ma.), who have supported raising the deposit insurance limit to unwarranted levels.
There is little empirical justification for this legislation when 99% of accounts are already insured under the current $250,000 limit. The median household balance is $5,300. This policy is a low value-add with a high price tag, benefiting corporations and wealthy individuals at the expense of regular depositors.
Estimates project the proposal will cost tens of billions. Banks pay quarterly assessment fees to the FDIC as an insurance premium. Raising costs for banks will inevitably increase costs for consumers. The FDIC acknowledges that assessment fees are ultimately passed down to consumers as they have published explicit guidance warning banks against disclosing FDIC-related fees to customers.
Research from the FDIC shows that deposit insurance premiums reduce lending and increase borrowing costs. During a recession, banks would pay more as their risk profile would increase due to declining asset values, prompting additional payments to the FDIC. Deposit insurance amplifies recessionary behavior as banks devote scarce capital towards the government instead of stimulating household spending and business investment.
The legislation neglects the lessons learned from the Silicon Valley Bank crisis. The Fed admitted in a report that regulators failed to follow up and enforce proper supervision. SVB had three times as many supervisory warnings as its peers prior to its collapse, and it failed internal liquidity stress tests mandated under the Fed’s regulation YY. Adding additional regulations will not fix the root issue of imprudent management when regulators already fail to enforce existing rules.
In the wake of the regional bank failures of 2023, some banks witnessed deposits flow to larger institutions, prompting them to call for heightened deposit insurance guarantees to retain depositors in times of stress. Make no mistake, these institutions are calling for the government to codify moral hazard.
Expanding deposit insurance increases moral hazard risk by weakening depositor discipline. Deposit flight should serve as a market signal for banks to alter their behavior. Muting that signal with deposit insurance means depositors feel less incentivized to monitor a bank’s financial health, enabling risky decisions instead of avoiding them. Despite attempts to regulate the banking sector through legislation such as Dodd-Frank, bank failures continue to occur. Deposit insurance does not prevent failures but merely raises their cost when they do occur.
Silicon Valley Bank removed interest rate hedges in a high-inflation, rising-rate environment. They deliberately exposed themselves to more risk despite being aware of internal liquidity issues.
In the 1980s, Savings and Loan institutions behaved similarly. Congress increased deposit insurance from $40,000 to $100,000. The Fed embarked on a historic rate hike trajectory when the asset portfolios of S&L institutions consisted primarily of fixed-rate mortgages, causing them to lose significant value. At the same time, they were forced to pay higher rates to savers to attract deposits. S&L institutions began increasing their exposure to riskier investments instead of prudently managing their liquidity. Congress ultimately authorized a taxpayer bailout in 1989 to resolve hundreds of insolvent S&Ls.
Proponents of expanded coverage ignore the fact that large banks are subject to enhanced regulations regarding bank capital ratios. Larger banks are incentivized to hold more liquid assets than what statutory minimums dictate to appease regulators. Excessive regulation is the root of the problem. Increasing government involvement in the financial sector will only exacerbate regulatory arbitrage rather than solve it.
The language of the bill is clearly biased toward one segment of the market. Banks holding fewer than $10 billion in assets are poised to be the biggest beneficiaries, yet they would be exempt from paying the special assessments to the FDIC that fund the proposal. Instead, the burden is shifted to their competitors, making this bill an explicit subsidy. This is textbook rent-seeking and will only reduce competition and consumer welfare.
Silicon Valley Bank’s collapse was an isolated event. Two years have passed, and no evidence of lasting fallout exists, undermining the Democrat narrative that more regulation is necessary to prevent a doomsday meltdown.
Expanding deposit insurance would only increase systemic risk, raise costs for consumers, and inhibit competition. Abandoning market discipline and shifting the tab to taxpayers to prop up unsound institutions should be avoided at all costs. The Hagerty-Alsobrooks bill is a blueprint for the next crisis. Lawmakers should reject bringing it to life.
