The brief bank run that occurred last month with the failure of SVB and Signature Bank has led financial regulators to consider further measures to prevent this kind of financial blunder from happening again. The FDIC, which stands for the Federal Deposit Insurance Corporation, is a regulatory agency created in 1933 by the United States Congress to maintain stability and public confidence in the nation’s financial system. The agency was created as a result of numerous bank failures that occurred throughout the financial crises that the United States has endured. In a nutshell, FDIC was created to insure depositors up to a certain amount if there was a bank run.
Source: American Deposit Management Co.
The insurance limit guaranteed by the FDIC evolved. In 1934, the very first insurance limit was $2,500. Only six months after the creation of the FDIC, government bureaucrats realized that the initial $2,500 limit was not enough to effectively support the banking system. Hence, on July 1st, 1934, they raised the insurance limit to $5,000. In 1950, the agency raised the insurance limit to $10,000, then to $15,000 in 1966; to $20,000 in 1969; $40,000 in 1974; $100,000 in 1980; then to $250,000 in 2008. Since 2008, the FDIC limited has been maintained at $250,000 until the recent bank panic of this year. Now the FDIC is considering raising the limit again if lifting it completely. Why though?
According to some lawmakers, “doing so will immediately halt the exodus of deposits from smaller banks, stabilize the banking sector and greatly reduce the chances of more bank failures.” It was speculated that if the insurance deposit were to be raised, it would be capped in the millions of dollars. Based on that speculation, an insurance cap of millions of dollars, in theory, would cover an amount that most Americans don’t have in their bank account to worry about ever having on deposit, of course. Other speculations argue that the FDIC might simply revoke the whole insurance limit, and make that insurance unlimited. One possible reason why the FDIC might consider lifting the insurance limit could be to ensure that depositors' funds remain protected in the event of a bank failure or a financial crisis. Under that premise, the FDIC guarantees depositors that no matter the amount they had in the bank, they will be insured that amount. This consideration became significant after the failure of SVB, a regional bank that worked with venture capital firms, which has billions of dollars of its depositors’ money.
The problem with lifting the insurance completely, or making it unlimited is that this unlimited insurance would be made to depositors at the expense of the taxpayers. This means that the federal government pledges to reimburse every depositor the amount owed. If a depositor had, for example, $100 million, the FDIC pledged to reimburse that money to the depositor, but where would the FDIC get that money to pay back the depositor? The federal government would have to raise taxes to increase fiscal revenue in order to make that payment. If raising taxes is not possible, the federal government will borrow the necessary amounts from the Federal Reserve, in exchange, the federal government will be selling treasury bonds. This thus would increase the money supply, and the money supply might outpace the quantity of goods and services produced, which will trigger inflation. Inflation, as we know is a hidden tax that the taxpayer does not see.
Lifting the FDIC insurance limit will be a very bad economic and financial decision because it will incentivize banks to make risker and reckless investments since no matter what happens, depositors will be insured the full amount of what they had in their banks. An unlimited FDIC insurance deposit will only trigger a lack of accountability for banks.