Understanding the Implications of Raising Deposit Insurance Limits
As a CEO of a community bank in Edmond, Oklahoma, I find myself surrounded daily by small-business owners, teachers, and city employees who have bestowed their trust upon us for their financial needs. They seek stability, transparency, and fair rules that will allow community banks to continue to serve them. Yet, a recent Senate proposal threatens to disrupt this balance.
The proposal to raise FDIC insurance cap on non-interest-bearing accounts to $10 million, while touted as a means of helping depositors and community banks, poses potential risks and shifts costs to Main Street. Equally noteworthy is the proposal’s extension to credit unions, which could significantly alter their balance sheets.
Existing Measures for Deposit Protection
At Citizens Bank of Edmond, approximately 90% of deposits are fully insured through a combination of tools. Across the nation, 99% of accounts fall below the current $250,000 threshold. For the small number of businesses, municipalities, and nonprofits that require more protection, established avenues already exist.
Reciprocal deposits and Federal Home Loan bank letters of credit have restrictions that promote sound risk management. These measures are only accessible to well-managed banks, thus minimizing risk to the overall system. Through these methods, my bank can offer tens of millions of dollars of FDIC coverage.
Examining Previous Bank Failures
Some institutions, such as Silicon Valley Bank, failed to effectively use these tools. This failure was compounded by weak regional regulatory oversight, concentrated deposits, and poor interest-rate risk management. In the wake of this crisis, community banks nationwide swiftly communicated with customers, reviewed coverage options, and bolstered trust. As a result, stability was maintained across Main Street banking.
Importance of Trust and Transparency
Since the collapse of Silicon Valley Bank, local institutions have continued to grow, their success founded on trust rather than bailouts. Any change to deposit insurance must be data-driven and fully transparent about the associated costs and who bears them. A higher limit might be justified, but only with clear evidence that it would strengthen stability rather than weaken the Deposit Insurance Fund.
Potential Risks of Raising Coverage Cap
A 40-fold increase in the coverage cap could invite moral hazard. Even well-intentioned banks could find ways to skirt the limits, distorting competition and undermining the discipline intended to be preserved by deposit insurance. Further, this proposal may drain the Deposit Insurance Fund, the backstop that bolsters public confidence in the banking system.
The extension of this large coverage to credit unions, which already enjoy significant regulatory advantages, would further tilt competition against local banks. Moreover, it could introduce more regulatory burdens for small banks due to increased government risk.
Seeking Meaningful Reforms
While the Trump administration has shown commitment to community banking, deposit insurance expansion at this scale is not the right next step. Policymakers should focus on reforms that strengthen community banks and the customers we serve.
Regulatory adjustments must be meaningful, not symbolic; the vast rulebook for trillion-dollar institutions should not be applied to a bank serving one county. Lowering community bank capital requirements and exempting small banks from complex accounting rules would free resources for community investment.
In Conclusion
A stronger banking system will not come from insuring every dollar. It will come from trusting and empowering the banks that are accountable to the communities they serve. Community banks, like the iconic George Baileys of It’s a Wonderful Life, are still run by individuals who know their customers by name. This deposit insurance proposal encourages banks to stretch the limits when times are good, with the Baileys paying the price.
Source: Here
