Once again, the proposal to raise the limits for insured deposits is back in the spotlight—this time with a focus on protecting business payment accounts. However, it is not just the usual suspects like Senator Elizabeth Warren (D-MA) pushing for it. Secretary of the Treasury, Scott Bessent, made remarks recently saying he would consider an increase. Any increase would be a mistake as business payment accounts can be hard to define, and ensuring higher amounts would lead to higher costs for consumers who would end up paying the premiums.
Franklin D. Roosevelt started the Federal Deposit Insurance Corporation (FDIC) in 1933. After the run on the banks during the Great Depression, the FDIC was there to insure accounts and prevent future bank runs. The FDIC offers insurance for accounts up to a specified limit. Currently, insurance limits for business payment accounts amount to $250,000 per ownership category. Since the 1930s, the limits have periodically increased, with the last increase occurring in the passage of the Dodd-Frank Act of 2010.
The failures of the Silicon Valley Bank (SVB) and Signature Bank in 2023 have been the impetus for some lawmakers to demand an increase to the deposit insurance cap. Both banks had sizeable amounts of uninsured deposits making them vulnerable to bank runs and spreading panic to other banking institutions. Then-Secretary of the Treasury, Janet Yellen, made a decision to invoke the systemic risk exception and covered the uninsured deposits.
Warren (D-MA) has been a proponent of increased limits and is using the SVB and Signature Bank failures to try and push them even higher. Bessent also appears to support increases, stating, “We will work with Congress to consider reforms to deposit insurance, including potentially higher limits for business payment accounts.” Additionally, Bessent responded to Warren in his committee hearing in January of this year noting it was “appropriate to evaluate deposit insurance expansion for small business bank accounts.”
The plan would immediately run into logistical problems, as the FDIC has said it can be hard to define accounts which would qualify for increased coverage. Any definition would not prevent account holders from finding ways to circumvent the parameters to get non-qualifying funds increased coverage.
Regardless of the practical challenges, increased insurance caps would lead to cost shifting, leaving the consumer to pay additional costs arising from an increase. While banks would receive the bill, it is unlikely they would absorb the entirety of the cost, which means the consumer would likely offset it to some extent. There is no such thing as a free lunch or free insurance.
It is important to keep consumers from picking up the tab for the wealthy, which is one of many consequences resulting from an increase. The FDIC reports that 99% of deposits are insured, and uninsured deposits are not as prevalent as some are being led to believe. With greater limits comes greater oversight and government regulation, according to Warren. “[R]ecognize that we have to [raise the insurance cap], because these banks are under-regulated, and if we lift the cap, we are requiring — or relying even more heavily on the regulators to do their jobs.” Additionally, Warren’s plans for the banking industry are not in everyone’s best interest. She has even said a nationalized U.S. banking system is not off the table. In 2023, she praised an op-ed in a ‘X’ post that favored turning banks into public utilities as a great next step. This is not a good direction for the banking system.
With an increase in insurance comes an increase in moral hazard leading to greater need for regulatory oversight. One seemingly small change would have major implications for all Americans, but the wealthy would be the major beneficiaries. Ultimately, any increase in the deposit insurance limit for businesses will result in a higher cost to the consumer through cost shifting; increases in moral hazard for banks leading to a need for greater government oversight and regulation; and an increase has been associated with a desire to nationalize the U.S. banking system. The long-term monetary and non-monetary costs are much higher and riskier than uninsured deposits.
Leah Locke is a policy analyst for the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, follow us on X @ConsumerPal.