The high-profile bank runs this year, and the Federal Deposit Insurance Corporation’s decision to guarantee deposits at banks that failed in March, led lawmakers to start talking about raising the cap on deposit insurance for the first time since the last financial crisis.

The FDIC stepped into the debate again this month, this time to recommend raising the cap on some business accounts. The agency’s report has added a specific debating point for members of Congress, but interviews suggest they are no closer to consensus. One objection is the ability to segregate one type of account from others and give it special treatment.

The $250,000 cap on insurance covers more than 99 percent of accounts, but the amount of uninsured bank deposits has grown dramatically in the last decade, leaving the institutions vulnerable to runs, the FDIC says, with about 47 percent of deposited funds  uninsured in 2021, the highest amount since 1949.

But the bank runs that resulted in the failure of Silicon Valley Bank of Santa Clara, Calif., and Signature Bank of New York in March reminded lawmakers what the cost can be even for the few big accounts that run well above the cap. Uninsured deposits amounted to 94 percent of SVB’s total and 90 percent of Signature’s, according to the FDIC.

“There’s discussion on do you raise the $250. The small- to medium-sized banks said you should eliminate the cap for two years. Others are saying raise the $250 to $500. Others are saying you sort of bifurcate the business deposits and individual deposits,” said Senate Banking Chairman Sherrod Brown, D-Ohio. “I don’t think there’s any consensus.”

There is certainly bipartisan interest in the issue.

“I don’t think the depositors ought to worry about losing their deposits,” Sen. Mitt Romney, R-Utah, said. “There are ways to get there, lots of ways. But that’s not something that should deter people from having money in banks.”

The FDIC examined three options for deposit insurance and endorsed one that would establish a separate, higher or possibly unlimited cap for deposits in accounts businesses rely on to fund day-to-day operations, such as payroll. Creating a special category for business payment accounts best balances reducing threats to financial stability and run risk caused by large uninsured deposits with holding costs steady and keeping the moral hazard, the FDIC said.

The $250,000 cap

The FDIC’s push for special business payment accounts has not caught on yet on the Hill, but Democrats and Republicans are interested in raising the $250,000 cap, with some considering the case for a higher limit or different treatment of all business accounts. 

“The key takeaway is that we need to change FDIC insurance caps because right now there is effectively an unlimited amount of FDIC government-backed deposit insurance, and yet the people who are profiting most from that are not paying a penny for it,” said Sen. Elizabeth Warren, D-Mass.

SVB in particular had big depositors, including many in the tech sector with tens or even hundreds of millions of dollars. Circle, a blockchain payment company, reportedly said it had $3.3 billion in deposits. Regulators said one reason for guaranteeing those deposits was the need to enable the companies to keep paying bills, including for workers.

But Warren criticized the FDIC’s business payment account recommendation, saying she would prefer an across-the-board increase of the $250,000 cap large enough to accommodate small businesses’ deposit needs. 

“I’m skeptical of increasing insurance limits for one kind of deposit but not others. Because as soon as there’s trouble somehow magically all of the deposits will become the kind that are insured,” she said in an interview. 

The FDIC agreed it would be a challenge to define payment accounts and ensure deposits weren’t moved from uninsured accounts with higher interest rates or lower fees to insured accounts during turmoil.

“I’m open on the exact number but the idea would be that every small business in America could know that its payroll will be fully protected regardless of whether they designate the money in an account as to be used for payroll, utility payments, rent, or whatever,” Warren said.

Sen. Mike Rounds, R-S.D., who sits on the Senate Banking Committee with Warren, said inflation should prompt a closer look at the $250,000, as well as an examination of how business deposits should be handled. 

“My question was with inflation running the way it is, is the $250,000 still appropriate? If we thought that $250,000 was appropriate 10 years ago, what would be an appropriate number now?” Rounds said. “But there are a lot of depositors who have a lot more than that.” 

Raising the cap, even by a lot, would have done little to prevent customers from running on Signature and SVB, where in some cases deposits numbered in the billions, the FDIC said in its report.

“Even with a ten-fold increase in deposit insurance, there are likely to remain large uninsured deposits that can pose financial stability concerns,” the FDIC said. “Although increases in the deposit insurance limit reduce run risk from depositors covered by the increase, run risk can be driven primarily by a small fraction of depositors who hold large concentrations of deposits.”

Business accounts

Members of the Senate Banking Committee said they’d like to examine business accounts and ways to protect them, either through a separate, higher cap on federal insurance for those accounts, private sector insurance or some other mechanism. They didn’t mention establishing an insurance cap specific to business deposits used for payments. 

Sen. Kevin Cramer, R-N.D., said business accounts have a unique set of needs, including quick, frequent access to deposits, and protection of those funds should reflect that.

“Somehow, we have to recognize that that needs to be insured in some way,” Cramer said in an interview. “Whether it’s a higher cap or a whole different mechanism, or a whole different vehicle or tool I’m not sure, but I’m certainly open to listening to people’s ideas.”

Sen. Mark Warner, D-Va., said setting a separate, higher cap for business deposits has promise. 

“I’m intrigued with the idea of raising the deposit insurance on individuals and maybe creating a different level on business because a lot of small and midsize businesses may have a couple million dollars in and out just on their cash flows,” he said in an interview. 

More information is needed about how much of the problem that would fix and what it would cost banks, he said. The FDIC deposit insurance fund is paid for through fees charged to banks. 

South Dakota’s Rounds said he’s open to a discussion about a separate, higher insurance cap for business deposits, but that there are already private sector options available. 

“I think it’s fair to bring it up,” he said in an interview. “There is already in the marketplace a commercial answer available. We may want to make sure that those depositors are aware that the banks do have that available right now today.”

“We simply got more to learn about it before we could make a good decision,” Rounds said.

Discouraging uninsured deposits

Skeptics of an increase note the costs to smaller banks that hold largely insured deposits.

“I don’t know that that’s necessary,” Sen. Cynthia Lummis, R-Wyo., said in an interview. “I definitely don’t want small banks, small community banks to have to have their insurance rates raised, or assessments raised because of the failures of these larger banks that took on so much risk.” 

Other senators said banks should be discouraged from overloading on uninsured deposits, leaving them vulnerable to runs.

“We cannot allow banks to get such a high percentage of uninsured deposits. That’s nuts,” Sen. Chris Van Hollen, D-Md., said in an interview.  “Whatever efforts we take, we need to find out what a reasonable level or share of uninsured deposits is.”

Van Hollen and Lummis sit on the Banking Committee. 

The FDIC recommended requiring banks to hold collateral against uninsured deposits or place limits on converting the funds into other liquid assets. 

Sen. Mike Braun, R-Ind., said he was skeptical of raising the deposit insurance cap, but suggested imposing a higher FDIC fee on banks with a high proportion of uninsured deposits to account for the greater risk. 

The banking sector’s reliance on uninsured deposits has increased since the 2008 crisis, growing from $2.3 trillion in uninsured funds that year to $7.7 trillion at the end of 2022, according to the FDIC. Uninsured deposits are held in a small share of accounts but can be a large proportion of banks’ funding, particularly among the largest 10 percent and largest 1 percent of banks by asset size, the agency said. 

“Those banks that do that ought to pay a higher FDIC fee. Don’t slap higher fees on the banks that are in perfectly good shape,” Braun said in an interview. “If you’re a bank like that and you take more risk, you should be paying higher fees.”