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FDIC recommends raising deposit insurance cap for businesses

Congress would have to legislate any increase

Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, said business payment accounts pose more stability concerns.
Martin Gruenberg, chairman of the Federal Deposit Insurance Corporation, said business payment accounts pose more stability concerns. (Tom Williams/CQ Roll Call photo)

The Federal Deposit Insurance Corporation on Monday endorsed raising the deposit insurance limit for businesses following high-profile bank failures that prompted regulators to cover billions of dollars in uninsured deposits, but didn’t specify a new cap.

Members of Congress have grappled with whether to raise the $250,000 cap on deposit insurance in the wake of the failures of Silicon Valley Bank of Santa Clara, Calif., and Signature Bank of New York in March. JP Morgan Chase bought First Republic Bank, headquartered in San Francisco, on Monday after it, too, was seized by regulators. 

FDIC Chairman Martin Gruenberg said raising the insurance cap for business payment accounts while leaving the $250,000 limit in place for others would best balance the risk of moral hazard against the need for financial stability. The FDIC released a report examining the options for raising the deposit insurance cap, which would require action from Congress.

“Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects,” Gruenberg said in a statement. “Large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability.”

Bank regulators used the systemic risk exception to cover all deposits at both SVB and Signature, covering the costs through the FDIC’s deposit insurance fund paid for through fees levied on banks. JPMorgan Chase acquired First Republic’s deposits as part of the sale.

More than 99 percent of accounts fell under the $250,000 cap as of December of last year, but growth of uninsured accounts has made the system more vulnerable to bank runs, Gruenberg said, adding that uninsured deposits accounted for 47 percent of deposited funds in 2021.

The FDIC examined three options for raising the deposit insurance limit before landing on an approach centered on business payroll accounts as providing the greatest benefits while minimizing risk. The regulator also examined raising the $250,000 cap for all accounts or removing the limit entirely and fully insuring all deposits. The FDIC didn’t weigh in on where an increased insurance cap should land. 

Other policy changes could accompany increases to deposit insurance coverage, including requiring large, uninsured deposits to be collateralized or limiting the ability to convert them into other liquid assets, the FDIC said in the report. 

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