Watch out, America. Some are proposing a change that will have average consumers bailout billionaires and businesses if their bank fails. The proposal is tantamount to welfare for the rich.
In recent remarks, Treasury Secretary Scott Bessent said “we will work with Congress to consider reforms to deposit insurance, including potentially higher limits for business payment accounts.” Such a move would open the door to raising the deposit insurance limit to other larger accounts, including more wealthy consumers. That view is oddly consistent with Sen. Elizabeth Warren’s suggestion that the FDIC insurance caps should be raised potentially as high as $10 million per depositor per account.
The Federal Deposit Insurance Corporation (FDIC) was established to protect depositors from losing all their money in the unlikely event of a bank failure. Today, the FDIC will replace dollar-for-dollar deposits up to $250,000 per depositor ($500,000 for joint accounts) for each bank and for each account category, with the possibility of additional recovery once bank assets are sold off.
On the surface, it might seem that more deposit insurance is good for consumers, but the reality is that is puts average consumers on the line to backstop those with large deposits – favoring the wealthy and businesses – because the added insurance costs will ultimately be passed along to consumers.
That means raising the deposit insurance cap will spread costs to everyone, while the benefit will accrue to wealthy consumers or businesses that should be able to determine the health of a bank on their own. Most consumers are already covered under the current FDIC insurance cap. In fact, the FDIC reports that more than 99% of accounts are insured. This means changing the cap literally just helps the 1% – at the expense of the rest of us.
It’s not even clear why this increase is needed. Wealthy consumers and big businesses with millions of dollars are savvy enough to put their funds in multiple holdings and at multiple banks. In other words, raising the cap would benefit a special few and represent extra government support for the rich.
There could be proposals that will try to limit the cap increase to business “payment accounts,” but that’s a potentially vague term that could end up being very expansive – and very costly. No matter how you slice it, the average consumer will end up paying more.
And it will come at quite a price. Advocates of more deposit insurance have made no secret of the fact that this is just a first step to an expressed goal to nationalize the U.S. banking system. No wonder Sen. Warren likes the idea so much. She’s made no secret that if banks receive more deposit insurance, she wants more regulation in return, telling Bloomberg that, “You bet I’d tie them together.” What does more regulation mean for consumers? You guessed it – higher prices.
And then there are the steep financial risks that will occur if the deposit insurance cap is raised. Raising the cap creates “moral hazard” because it gives bad banks more cover to be even riskier. The greater risks they take at the government’s expense, the greater the cost to government and all of us when they inevitably screw up.
No need to take my word for it. Every time the government has raised the deposit insurance cap, that has led to more bank failures. There is a statistically positive correlation between deposit insurance caps and insolvencies. Ironically, after successfully navigating the last financial crisis, why should policymakers want to take a step backwards and increase the risk of another financial catastrophe?
DOGE has made great strides in reducing the size of government. So, it’s unclear why policymakers would want to grow regulation, increase risks to the FDIC fund, hurt lower-income consumers, and skyrocket the government’s role in controlling the private banking system. Raising the deposit insurance limit, even for payment accounts, vastly broadens the government’s reach.
History shows that increasing the deposit insurance cap raises the risks of a financial collapse. Even contemplating this sends the wrong message, emboldening Sen. Warren and her allies as they seek to turn banks into public utilities. We don’t need a bigger government backstop, and we don’t need subsidies for the rich.
Steve Pociask is Chief Executive Office and founder of the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.