Update 912 – FDIC Insurance Reform
Unfinished Business from 2023 Crisis
With Congress now out of session, we can drill down on a key piece of unfinished banking policy from the 2023 crisis and the state of play of current legislative proposals to address it. The bank failures of spring that year laid bare the unfair competitive advantage benefiting large depository institutions – the implicit guarantee that size means safety. The Senate Banking and House Financial Services Committees are now, at long last, seeking to reform the federal deposit insurance system, with discussions gaining momentum in recent months.
Proposals include bills to increase the federal deposit insurance limit for accounts exceeding the $250,000 deposit insurance limit used by businesses for their operating, payroll, and everyday expenses. As members continue to seek consensus, we encourage any reform to be simple to prevent confusion, limit the burden of increased assessments on small and community banks, and prevent further entrenchment of the too-big-to-fail dynamic in our banking system.
Happy Thanksgiving, all…
Best,
Dana
Federal deposit insurance has provided confidence and stability to the U.S. banking system since its creation in the 1930s, during the turmoil of the Great Depression. The Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Administration (NCUA) now insure deposits up to $250,000 per depositor at each of the nation’s insured financial institutions.
While depositors have never lost a penny of their federally insured deposits, the banking failures of spring 2023 left businesses with balances exceeding $250,000 in accounts used for operations and payroll unsure if they would be able to pay their employees, as deposits exceeding the federal limit were feared lost. Now, legislators are discussing bipartisan reforms to modernize and strengthen the federal deposit insurance framework, particularly to protect these very deposits.
Concerns Raised by Banking Stress of Spring 2023
Federal deposit insurance protects bank customers in the event an insured depository institution fails. More than 99 percent of all accounts in the United States – those held by businesses and individual retail customers – are under the $250,000 deposit insurance coverage limit and are fully protected by the federal government. Federal deposit insurance coverage is not funded by taxpayers, but through assessments paid by insured depository institutions into the FDIC’s Deposit Insurance Fund. Assessments are risk-based, with larger, riskier depository institutions contributing more each quarter.
In early March 2023, Silicon Valley Bank and Signature Bank failed in the second and third largest bank failures in American history at the time. Both banks had unusually high levels of uninsured deposits since they focused on serving large business clients that held millions in operating, investor, and payroll funds in single accounts, as opposed to small retail accounts. At the end of the previous year, Silicon Valley Bank had over $151 billion and Signature Bank had nearly $80 billion in uninsured deposits.
Several companies that handle payroll services for businesses, including Rippling and Patriot Software, also held uninsured deposits at the failed banks. In the days after the bank collapses, accounts at the banks were frozen as the bank was taken into receivership, standard bank resolution practice at the FDIC. Thousands of businesses across the country that held payroll accounts at Silicon Valley Bank and Signature Bank, or who depended on payroll companies that held large operating accounts at the banks, were left scrambling to meet their payroll obligations. Depositors who held payroll funds in excess of the $250,000 federal deposit insurance limit at the banks feared losing their uninsured funds.
As fear spread over the subsequent days, depositors moved a total of $119 billion out of small banks and deposits at large banks rose by $67 billion in less than a week. Depositors saw small banks as risky and large banks as too big to fail, and were able to move substantial sums at an unprecedented pace with the technology of online banking.
To quell spreading contagion, then-Treasury Secretary Janet Yellen, acting on the recommendations of the FDIC and the Federal Reserve and after consultation with the President, took the extraordinary step of invoking the statutory systemic risk exception to protect insured and uninsured deposits of the failed banks, including not only uninsured deposits of small businesses, but also those of large firms like Roku, which announced it had over $480 million at Silicon Valley Bank when it collapsed.
The holders of uninsured deposits at the First National Bank of Lindsay in Oklahoma were not similarly protected by the federal government when the bank failed in October of last year. The bank had $108 million in assets, far less than Silicon Valley Bank and Signature Bank, before it was closed by federal regulators. One local business owner said he lost $150,000 in uninsured funds held in an account used for business operations. Following the bank’s failure, the FDIC stated that about $7 million in deposits at the bank were uninsured.
The federal government’s decision to protect the uninsured deposits of Silicon Valley Bank and Signature Bank, including those of large tech and crypto firms, but not the uninsured deposits of small and mid-sized banks that have failed since raises concerns that large depository institutions continue to benefit from an implicit guarantee of safety, an unfair competitive advantage.
Proposed Reform: Expanded Coverage of Business Transaction Accounts
The prospect of reforming federal deposit insurance to protect business transaction accounts gained traction soon after the bank failures, with Senator Elizabeth Warren (D-MA) saying, “regulators should reform deposit insurance so that both during this crisis and in the future, businesses that are trying to make payroll and otherwise conduct ordinary financial transactions are fully covered…” in an op-ed published the day after the Treasury Secretary announced that Silicon Valley Bank’s uninsured deposits would be covered.
In May 2023, several months after the failures of Silicon Valley Bank and Signature Bank, the FDIC published a report outlining options for reform of the federal deposit insurance system. The report indicates that “Targeted Coverage—significantly increasing deposit insurance coverage to business payment accounts—is the most promising option to improve financial stability relative to its effects on bank risk-taking, bank funding, and broader markets,” but involves “significant unresolved practical challenges.” These include defining business payment accounts in the structure of the deposit insurance system and delineating between accounts eligible to receive higher coverage.
Alsobrooks-Hagerty Depositor Protection Bill
Discussions regarding deposit insurance reform lost steam last Congress, but the introduction of relevant legislation in recent months has led to renewed bipartisan engagement from members of the Senate Banking Committee. This August, two committee members – Senators Angela Alsobrooks (D-MD) and Bill Hagerty (R-TN) – filed an amendment to the Fiscal Year 2026 National Defense Authorization Act (NDAA) that would increase deposit insurance coverage on business transaction accounts up to $20 million for insured depository institutions with less than $250 billion in assets. The amendment will not be included in the must-pass NDAA bill as the senators are instead working with Committee Chair Tim Scott (R-SC) and Ranking Member Elizabeth Warren (D-MA) to advance legislation as a standalone bill rather than an amendment.
Chair Scott and Ranking Member Warren reportedly discussed options to expand deposit insurance over several months ahead of a committee hearing on deposit insurance reform in September, during which members on both sides of the aisle sought to understand the tradeoffs involved in specific reforms. Following the hearing, Senators Alsobrooks and Hagerty introduced S.2999, the Main Street Depositor Protection Act, which would:
- Provide $10 million of deposit insurance coverage for noninterest-bearing transaction accounts.
- Ensure insured depository institutions with less than $10 billion in assets will not be required to pay increased assessments for a ten-year transition period.
- Require the FDIC and NCUA to publish a plan in the Federal Register within one year of the bill’s enactment for gradually increasing the portion of insured deposits in transaction accounts over a ten-year transition period.
The bill has been endorsed by the Independent Community Bankers of America, the Mid-Size Bank Coalition of America, and America’s Credit Unions, but has not received public support from trade groups representing the nation’s largest banks. This may be because expanded coverage would be funded through increased risk-based assessments paid by these large insured depository institutions.
HFSC Hearing and Waters Reform Bill
The House Financial Services Committee (HFSC) held its own hearing on the issue last week, in which members on both sides expressed interest in reform. H.R.4551, the Employee Paycheck and Small Business Protection Act – a bill reintroduced by Committee Ranking Member Maxine Waters (D-CA) in July – was noticed at the hearing. The bill would:
- Authorize the FDIC and NCUA to collect data, conduct analysis, and issue a proposed rule within 18 months to increase the deposit and share insurance threshold for business payment accounts from $250,000 to a higher dollar threshold. The agencies would jointly determine this higher threshold.
- Require FDIC and NCUA Chairs to testify on their findings and proposed rule, then require the agencies to implement the expanded insurance coverage within 30 months. If the agencies fail to implement the expanded insurance coverage over this period, they would be required to testify before Congress once again.
Unresolved Concerns Remain as Debate Continues
Witnesses at both the Senate and House Committee hearings raised concerns about the need for more granular data as discussions continue. In October, Chair Scott reportedly requested additional information from the FDIC, including the current proportion of uninsured deposits in the U.S. banking system, the costs to banks should the insurance limit be increased, and how increasing the limit would change market behavior and incentives for banks and depositors. Senate Banking Committee Chair Scott and Ranking Member Warren are reportedly seeking to include a provision requiring a study on deposit insurance in the NDAA, but HFSC Chair French Hill (R-AR) has blocked the bipartisan plan from moving forward.
As discussions continue, members have yet to reach a consensus on important aspects of reform, including the structure of a framework for expanded coverage for transaction accounts, an appropriate level of increased deposit insurance for transaction accounts, and the timeline over which such reforms would be implemented.
Treasury Secretary Scott Bessent has supported congressional efforts to modernize the deposit insurance framework, saying “I am encouraged to see emerging bipartisan support for increasing FDIC insurance limits on noninterest-bearing transaction accounts.”
20/20 Perspective
It is key that any reform to the federal deposit insurance framework be simple to prevent confusion for depositors and depository institutions, only expand coverage to non-interest earning accounts, and limit the burden of increased assessments on small and community banks. Expanding deposit insurance coverage to business transaction accounts would help address the too-big-to-fail dynamic that exists in today’s banking system by making clear that business deposits in excess of $250,000 are safe at banks of all sizes, not only the largest in the nation.
We applaud the bipartisan work towards common sense reform and encourage legislators, particularly in the House, to pursue bipartisan legislation expanding coverage for business transaction accounts, in coordination with their colleagues in the Senate.