SVB collapse: Influential lawmakers call to lift $250,000 cap on FDIC deposit insurance
Zachary Halaschak
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Several prominent lawmakers are now calling for an increase in the Federal Deposit Insurance Corporation’s $250,000 insurance limit amid the continuing fallout from Silicon Valley Bank’s collapse.
SVB failed just over a week ago, and lawmakers, eager to prevent calamity in the banking system, have begun discussing raising the FDIC’s statutory $250,000 cap or temporarily removing it to back all depositors and instill confidence.
Others, though, say that doing so would harm the banking system in the long run by making it less likely that depositors scrutinize their banks and demand responsible stewardship.
Of note, the last time the FDIC limit was raised was during the 2008 financial crisis. At the time, it was temporarily hiked from $100,000 (where it had been since 1980) to $250,000 and then permanently set to that level due to the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.
Sen. Elizabeth Warren (D-MA), who is among the most liberal lawmakers in the Senate, said Sunday on CBS that raising the limit has “got to be on the table right now” amid the turmoil in the banking sector.
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“I think the lifting the FDIC insurance cap is a good move. Now the question is where’s the right number on lifting? But recognize that we have to do this, because these banks are underregulated, and if we lift the cap, we are requiring — or relying even more heavily on the regulators to do their jobs,” the Massachusetts Democrat said on Face the Nation.
Warren didn’t pitch a specific new level in which to raise the cap, although she mentioned $2 million, $5 million, and $10 million in wondering about where that ceiling should land. Warren wouldn’t say whether she has already spoken to the White House about lifting the cap.
Sen. Mark Warner (D-VA), who is notably a member of the Finance and Banking committees and a former venture capitalist, told Bloomberg he is “open” to extending FDIC insurance for two years to deposits of all sizes, although he is a bit concerned about encouraging risk-taking and said he doesn’t “want to rush because to take that leap is a big leap.”
But it isn’t only Democrats who are mulling changes to the FDIC’s limit. Sen. Mike Rounds (R-SD) wondered about raising the cap during an appearance on NBC’s Meet the Press.
“Perhaps that’s not enough,” Rounds said of the $250,000 limit.
Rep. Blaine Luetkemeyer (R-MO), a former banker himself, suggested last week that the government should begin temporarily insuring every bank deposit in the country as a way to shore up confidence in the U.S. banking system. He said doing so would help smaller banks navigate the fallout of SVB’s failure and bolster trust in the U.S. banking system.
“If you don’t do this, there’s going to be a run on your smaller banks,” Luetkemeyer told Politico. “Everyone’s going to take their money out and run to the JPMorgan’s and these too-big-to-fail banks, and they’re going to get bigger, and everybody else is going to get smaller and weaker, and it’s going to really be bad for our system.”
But others are pushing back on expanding insurance.
Mark Calabria, the former director of the Federal Housing Finance Agency, told the Washington Examiner that the cap should be lowered, rather than raised. He said raising it would be a move in the wrong direction and, even if made temporary, might end up being semi-permanent in the way the $250,000 number ended up being in 2010.
Calabria pointed out that the vast majority of depositors have nowhere near the limit of $250,000 in the bank. He also said there is a market where businesses can buy private insurance and noted there are “all sorts of gimmicks” where money can be divided up between different banks.
“There [are] already functionally ways for coverage around it. Now, of course, I think we should fix some of those loopholes, but with that said, this just isn’t something where there is a compelling need,” he said.
Calabria said academic evidence indicates that more generous deposit insurance makes financial crises more likely and means that people put less money into mutual funds and stocks.
“So you end up actually perversely growing the size of your banking system, and you end up reducing monitoring of the behavior of the banks, so you end up with a bigger banking system, and you end up with more risk-taking by the banks,” he said.
Amid the growing push for expansion of the FDIC insurance program following SVB’s collapse, members of the conservative House Freedom Caucus released a statement on Monday opposing more “bailouts” of banks.
“Furthermore, Members of the House Freedom Caucus oppose any universal guarantee on bank deposits over the current limit, as well as any attempt to force unnecessary, burdensome regulations or costs onto small and mid-sized banks (and their customers) who are at no fault in this crisis,” they said.
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Meanwhile, the upheaval in the banking system continued on Monday.
Shares of First Republic Bank fell by over 47% on Monday alone following the news that S&P Global had downgraded the credit rating of the bank once again after previously revising it downward last week. First Republic has plunged 90% in the last month.