If the public perceives their money as safer in a mega-bank than it is in a community bank, deposits, theoretically, will migrate to the mega-banks. The systemically-important or too-big-to-fail advantage increases the relative cost of funding for community banks. Government can only resolve this unlevel playing field by protecting all deposits at all banks. But that doesn’t mean it should do so.
Ironically, in the first quarter, deposits in the banking system collectively declined by 2.5 percent, while deposits at community banks actually increased.
Depositors, on the whole, might have a high degree of confidence in their bank to keep their money safe. Many community bank customers “gamble” that their deposits will be safe even if their bank fails. They know the FDIC is typically able to arrange the sale of a failed bank to a healthy bank. The FDIC prefers buyers that take all the deposits. Rarely, in fact, is the Bank Insurance Fund tapped to protect deposits, whether a cap is respected or not.
A good argument can be made that insurance ought to cover business transaction accounts, or accounts that primarily fund payrolls, given these accounts can easily exceed the current cap. Since insurance premiums are based on assets, the FDIC should cover these additional deposits without increasing premiums. But practically speaking, I think we know that is unrealistic. When has a bank ever gotten anything for free? But, if no depositors are asking for that kind of protection, why should bankers seek to provide it? Deposit flows so far do not show this is a priority with the public.
During the 2008 financial crisis, the FDIC increased the deposit insurance limit to $250,000 from $100,000 and Congress made that change permanent with the Dodd-Frank Act. It seems like a crisis gets people thinking about deposit insurance. But if you call two bank failures in March a crisis, a coverage increase of a set dollar amount this time around is probably not the answer. Better to identify particular kinds of accounts (business operating accounts, non-interest bearing accounts, etc.,) as candidates for potential additional coverage regardless of balance.
Since a change in the rules is going to require an act of Congress, we know nothing is likely to change for quite a while. For all the media coverage, I haven’t really heard a groundswell of support for increases in coverage. Bankers are ambivalent about it. Perhaps this is one crisis we can let pass without making changes to the deposit insurance rules.