Proposals are now circulating in Washington to increase deposit insurance limits radically, including the bill from Sens. Bill Hagerty (R-TN) and Angela Alsobrooks (D-MD) to boost coverage from $250,000 to $10 million for certain accounts. This represents a highly regressive policy and a troubling break from the deregulatory policy agenda of President Donald Trump.
At first glance, the idea might sound like “protection for Main Street.” However, it’s the exact opposite — a payment from poorer depositors to richer ones. About 99% of deposits are covered by the existing coverage, so if protecting Main Street is the objective, we are already done. The remaining 1% of deposits are from sophisticated parties with large accounts. Protecting them will necessarily raise deposit insurance premiums for banks, which will need to be partly recovered through lower interest rates or higher borrowing costs for the 99%. In other words, banks will have higher costs, and those costs will be passed along to their customers. Limiting credit to small businesses and consumers should not be the price of subsidizing large depositors. How is that helping Main Street?
Deposit insurance, like most insurance, limits the incentive to control losses insured as they are paid by others: that is, it induces moral hazard. A sweeping government subsidy for large regional banks and wealthy corporate depositors would encourage reckless risk-taking and ultimately leave everyday consumers and taxpayers holding the bag. Whether Main Street pays through worse banking terms or taxes is less relevant. By promising to shield multimillion-dollar depositors from losses, Washington would remove one of the last remaining checks on risky behavior in banking: the discipline imposed by market accountability.
RESTORING AMERICA: THE CASE AGAINST THE CFPB’S OPEN BANKING RULE
Without that discipline, banks face fewer consequences for gambling with depositors’ money. The history is clear. From the S&L crisis to 2008 to the failures of 2023, moral hazard has been the hidden fuse behind major financial explosions.
This is not a hypothetical risk. The proposed $10 million cap would apply to nearly every bank in the country, including institutions with hundreds of billions in assets. Only the very largest “global systemically important banks” would be excluded. In other words, this proposal would extend increased costs to virtually every bank except the biggest Wall Street banks — welcome to Washington, D.C.’s definition of helping Main Street.
The dynamic long-term regulatory consequences are also of great importance. Sen. Elizabeth Warren (D-MA) and others have spent years arguing that higher deposit insurance limits must be paired with stronger federal regulations. There is no more certain D.C. dynamic than when Uncle Sam pays more, he regulates more. Anyone who doubts that should simply ask Warren whether she believes this bill requires new lending and risk-management rules — she will almost certainly say yes.
The irony is that, far from protecting the banking system from our government, these proposals pave the way for more federal control. They invite the very kind of regulatory favoritism of rich over poor that many conservatives dislike. The mission of federal deposit insurance has always been to protect ordinary depositors, not to make them bear the burden of higher premiums to cover corporate treasurers with multimillion-dollar accounts.
The case for expanding deposit insurance rests on the false premise that there is no other way to manage large deposits safely. The private sector has long offered efficient market-based alternatives, such as deposit sweep programs, which automatically spread funds across multiple insured accounts. These tools already provide full protection without putting poorer depositors and taxpayers or the broader financial system at risk.
As I have argued elsewhere, crypto is an additional market-based alternative that may cut financial contagion and systemic risks inherent in fractional-reserve banking. Under such banking, only a fraction of deposits is held in reserve to cover normal withdrawal activity, while the rest is invested for the bank to make a return. When investments go bad or deposits are withdrawn at abnormally high amounts through runs, the bank faces a liquidity crisis, which can cascade throughout the market. These risks are due to the concentration of the third-party middleman function of banks. By cutting out the risky middlemen engaged in fractional-reserve banking, stablecoins or similar mediums offer a useful market-based alternative without the risk of bank runs.
RESTORING THE AMERICAN DREAM REQUIRES RESTORING PROPERTY RIGHTS
Expanding deposit insurance to $10 million may sound like a technical reform, but it’s the opposite — a wrongheaded shift in the opposite direction toward more centralized control of banks. It replaces market innovation and discipline with political favoritism, substitutes self-reliance with moral hazard, and invites the next wave of costly financial bailouts.
To protect Main Street, lawmakers must reject this highly regressive bill and stand by the principles that rebuilt America’s economy: limited government, market discipline, and accountability in risk-taking.
Tomas Philipson is the Daniel Levin Chair in Public Policy at the University of Chicago and former acting chairman of the Council of Economic Advisers under President Donald Trump
