1. Why is there a limit on insured deposits?
The goal of federal insurance is to boost confidence in the US banking system without guaranteeing every penny deposited in banks — almost $18 trillion currently. First implemented in 1934 in response to a bank panic the year prior, federal deposit insurance began with a cap of $2,500, equivalent to about $56,00O today. It was “an immediate success in restoring public confidence and stability to the banking system,” according to the FDIC. The cap on insured deposits has been raised seven times, most recently in 2008 to its current $250,000.
2. Why is there talk of raising the limit?
A pair of bank failures, including the largest in more than a decade, served as frightening reminders to wealthy Americans and small businesses that their uninsured deposits — those over $250,000 in any single account — could be vulnerable. As they moved money to larger banks that seemed more stable, the withdrawals from smaller regional lenders increased the pressure on them — a vicious circle. Raising the limit could reassure customers at small banks that their money is safe, breaking that cycle. Among those advocating for the move is Elon Musk, the richest American and the chief executive officer of Twitter Inc. and Tesla Inc., who said increasing the limit was “absolutely required” to stop bank runs.
3. Who has the power to raise or scrap the limit?
Normally, increasing the FDIC’s insurance limit requires Congress to sign off, a sizable hurdle in an era of deep political divides. But authorities have been discussing a legal framework they could use to temporarily expand FDIC insurance in an emergency, according to people with knowledge of the talks. It would use the Treasury Department’s authority to take emergency action and lean on its Exchange Stabilization Fund, which is typically used to buy and sell currencies but has also backstopped emergency lending facilities in recent years. Treasury Secretary Janet Yellen cast doubt on such a plan in remarks to Congress on March 22: Insuring all deposits is “not something that we have looked at,” she said, adding that it wasn’t the right time to determine if the limit should be raised.
4. What are the chances of this happening?
At the moment, even those brainstorming this scenario have no intention of carrying it out, the people familiar with officials’ thinking said. But they want a plan in place in case the situation worsens. Some US lawmakers such as Senator Sherrod Brown, the Democrat who chairs the Senate Banking Committee, see a window for bipartisan cooperation on FDIC changes. Those could include eliminating the cap permanently or temporarily and creating a different insurance category for businesses. But any legislative effort would face a steep uphill battle in a divided, factious Congress.
5. How much insurance would be needed to guarantee all US deposits?
It doesn’t take $18 trillion to insure $18 trillion in deposits. Banks typically have far more assets than deposits; if an institution fails, the assets are sold off to cover payouts to depositors. Sometimes the assets don’t generate enough cash in a quick sale, leaving a shortfall, which is where the FDIC’s insurance comes in. As of the end of 2022, the FDIC had just over $128 billion in its Deposit Insurance Fund, backing more than $10 trillion in insured deposits. The Deposit Insurance Fund is funded two ways: through premiums charged to the insured banks, and through interest earned on funds invested in US government securities.
6. Who’s opposed to the idea?
Some conservative lawmakers have come out staunchly against any increase in FDIC insurance, with the hardline House Freedom Caucus saying it would oppose any universal guarantee of bank deposits above $250,000 and with Senator Josh Hawley, Republican of Missouri, warning against bypassing Congress to enact what he considers a bailout. Other Republicans in the Senate, though, have indicated an openness to the idea — while their progressive Democratic colleagues want to tie action on deposit insurance to stiffer regulations for banks.
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