Following the three recent bank failures, the Federal Deposit Insurance Corporation is advocating for an increase in the deposit insurance limit for business payment accounts.
Currently, the FDIC guarantees each account ownership category up to $250,000 per depositor. However, when Silicon Valley Bank and Signature Bank failed, the agency backed deposits exceeding that limit in order to reduce the risk of further bank runs. In the aftermath of the Great Recession, it also extended temporary unlimited deposit insurance to non-interest bearing accounts.
Individuals can simply increase their coverage by opening extra accounts at various institutions. However, this is much more complicated for businesses, which, according to the FDIC, generally keep the funds used to pay employees in a single bank account.
For example, following the demise of SVB, Etsy had to delay payments to a limited number of sellers by a day, although the business claimed this was not due to a lack of available funds. Meanwhile, Roku kept about $500 million in deposits at SVB, nearly all of which would have been unrecoverable if the FDIC had not stepped in to insure deposits above the $250,000 limit. CNN’s request for comment was not met with a response from Roku.
The suggestion, contained in a report issued Monday, did not identify what it considers to be a suitable enhanced level of deposit insurance for corporate payment accounts.
Other deposit insurance reforms considered by the FDIC included raising the insurance cap across all bank accounts and extending unlimited deposit insurance to all accounts. It discovered that targeting business accounts for enhanced insurance was the best option since it provides the most “financial stability benefits relative to its costs.”
Increasing deposit insurance creates a moral hazard since it may lead to banks taking on more risk with their depositors’ money without fear of a bank run.
There’s also a cost associated with raising the insurance cap.
The fund that backs up depositors’ money is funded by premiums paid by banks and savings organizations. At the end of 2022, the fund had a balance of $128.2 billion. However, after the FDIC seized First Republic Bank on Monday, and following the failures of Silicon Valley Bank and Signature Bank, its balance is estimated to be $92.7 billion, the lowest since 2018.
Increasing the insurance cap on business payment accounts will almost certainly result in higher FDIC premiums paid by banks. And doing so would almost certainly necessitate Congressional action, according to FDIC officials.