WASHINGTON — The Federal Deposit Insurance Corporation on Monday recommended that Congress consider expanding regulatory powers to boost certain deposits so banks can be prevented from cracking down.
The proposal came on the same day the FDIC coordinated the foreclosure of First Republic Bank and its sale to JP Morgan, weeks after the Silicon Valley bank scramble sowed the seeds of its collapse.
Currently, the FDIC only guarantees bank deposits up to $250,000. Banks with a high proportion of uninsured deposits, especially small and medium-sized banks, are therefore at risk of crackdown. The FDIC estimates that banks held $7.7 trillion in uninsured deposits at the end of last year. This represents approximately 43% of total US deposits.
FDIC Chairman Martin Gruenberg said: “While the vast majority of deposit accounts remain below deposit insurance limits, the growing number of uninsured deposits is exposing the banking system to bank runs. I am emphasizing that,” he said. report. “Concentrations of uninsured deposits increase the likelihood of bank runs and could threaten financial stability.”
Concerns over the stability of the banking system have led to deposit outflows from smaller regional banks to larger banks in recent weeks. That’s because nervous customers are moving their money to banks deemed “too big to fail.”
Some members of Congress are seeking ways to raise deposit limits, at least temporarily, to discourage depositors from withdrawing funds from the smaller institutions at the center of the recent banking ruckus. .
FDIC officials admitted Monday that the bank runs spooked them. As part of their review of what happened, regulators have been studying ways to improve the system. The report highlighted the feasibility of raising existing insurance limits. Expand deposit insurance to unlimited. Create a more targeted approach that provides a higher level of deposit insurance for business accounts used for payroll processing.
The FDIC has expressed concern that the widespread expansion of deposit insurance could create a “moral hazard” problem. Since that money is typically used to pay employees rather than invest, it favored providing more protection to corporate payment accounts.
“Expanding its coverage to large deposit accounts with the highest liquidity demands will reduce the need for depositors of such accounts to withdraw funds out of fear of deposit safety and operational continuity. or eliminated,” the FDIC said. that report. “This will benefit financial stability.”
Regulators believe that such systems could introduce new complexities, regulators decide how to distinguish between different types of accounts, and investors exploit systems to gain greater protection. I acknowledged that I should try not to find a way to do it.
During the 2008 financial crisis and 2020 pandemic recession, lawmakers approved a temporary guarantee program for business accounts similar to the one the FDIC proposed Monday.
The FDIC does not recommend how high the new insurance threshold should be set, and officials say congressional legislation would be required to change the current system.
