The Biden administration has jumped to the conclusion that the only way to stop more bank failures is to increase the limit on deposit insurance, or the government backstop of certain bank accounts, up to $250,000 per depositor, per bank, per type of account ownership. This would be a colossal mistake because it would further entrench the federal government’s foothold in the banking sector, exacerbate moral hazard, restrict access to capital, increase banking service costs on taxpayers, enfeeble economic growth, and fail to stop financial instability.
In the wake of the recent bank failures, the Federal Deposit Insurance Corporation published a new
report
outlining options that would increase the deposit insurance limit. The report envisions that business payment accounts could be covered under a program similar to the
Transaction Account Guarantee program
, which was originally created in response to the 2008 financial crisis to guarantee any non-interest-bearing account. In 2012 Congress did not
reauthorize
the TAG program because there
would have been
“less private sector control of bank risk-taking.” Any bill to reauthorize the TAG program, even for business accounts, would carry moral hazard risks and propagate future risk-taking.
LIBERAL POLICIES ARE MAKING THE AMERICAN DREAM UNAFFORDABLE
Many business accounts are already covered under the current deposit insurance framework. Fewer than 1% of
bank accounts
have more than $250,000. Additionally, most small businesses are already covered by the current deposit insurance threshold. A
survey
of 600,000 small businesses found that their median bank balance is $12,100 — far below the current $250,000 threshold.
Businesses can already have more than $250,000 insured. Depositors can utilize private sector alternatives, such as
insured cash sweep accounts
, which will spread deposits among different banks.
Instead of more government guarantees and regulation, simple bank accounting tweaks offer more transparency and could alleviate risks of bank runs. One better
alternative
could be requiring “all assets held by banks to be marked to market,” as a recent Wall Street Journal opinion suggests. This is less onerous and offers more transparency on the market value of longer-dated securities. It also provides gradual clarity to depositors as to the true financial performance of a bank instead of surprising them with news of devalued bonds.
The Federal Reserve has acknowledged that fully insuring depositors at Silicon Valley Bank and Signature Bank worsened moral hazard. According to the Government Accountability Office’s
preliminary report
on the bank failures, Fed “staff raised concerns about exacerbating moral hazard and potentially weakening the market discipline of many depository institutions.”
Additionally, a GAO
report
from 2010 found that expanded deposit insurance “could weaken incentives for newly protected, larger depositors to monitor their banks, and in turn banks may be more able to engage in riskier activities.” This moral hazard has now resulted in the Deposit Insurance Fund losing an estimated
$18.5 billion
from SVB and Signature and
$13 billion
from First Republic Bank. These losses are ultimately passed down to taxpayers.
Instead of propagating moral hazard, regulators need to come to terms with their own supervisory failures. According to the GAO’s preliminary report on SVB and Signature, as early as 2011, GAO warned the FDIC and other regulators about problems with properly escalating “supervisory concerns.”
The FDIC’s reforms must be rejected by lawmakers. Instead of enhanced deposit insurance and a recreation of the TAG program, Congress should look at ways to increase accounting transparency and hold the Fed and FDIC accountable for their supervisory failures.
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Bryan Bashur is a federal affairs manager at Americans for Tax Reform and executive director of the Shareholder Advocacy Forum.
