Why FDR Limited FDIC Coverage

The objective was to protect depositors, not rich people and big companies

By Aaron Klein. Mr. Klein is a senior fellow in economic studies at the Brookings Institution. Excerpts:

"Federal deposit insurance was aimed at protecting the savings of the poor and middle class while leaving the rich to manage the risks of their large deposits. Extending it to large corporations and the wealthy would harm working people."

"Unlimited deposit insurance means that when banks fail, the government pays more. More than 90% of the cost of Silicon Valley Bank’s failure went to bailing out the uninsured deposits"

"Proponents say that banks (and maybe only the big ones) will be paying for deposit insurance. Basic economics shows that banks pass costs on to customers, particularly poor ones. As Georgetown legal scholar Adam Levitan states, “the higher costs for increased insurance premiums are likely to flow to the least price-sensitive and most ‘sticky’ customers: less wealthy individuals.”"

"Supporters of unlimited deposit insurance say that small businesses need this protection. They argue that businesses can’t be expected to keep an eye on the health of their bank. But the current system of limited deposit insurance seemed to be working before regulators bailed out Silicon Valley Bank. Most small businesses are already fully covered. One study of 600,000 small businesses found their median bank balance was $12,100, less than 5% of today’s deposit cap.

The deposit-insurance limit didn’t cause this crisis. Silicon Valley Bank’s management caused their bank to fail. The Fed failed as the bank’s supervisor. The bank’s auditors and credit-rating agencies didn’t catch the problem. SVB’s creditors, including the businesses that banked with them, ignored warning signs such as a Journal story five months ago flagging SVB’s problems."