A Closer Look at Deposit Insurance

This week, legislation was introduced that would give the Federal Deposit Insurance Corporation a six-month window to determine whether to increase its deposit insurance limit up to $5 million for certain types of accounts.

Here's some key context about the current federal deposit insurance limit:

• Nearly every household and small business is already fully covered under today’s limits, and raising the limit would benefit less than 1% of all depositors.
• Expanding this coverage would raise costs, reward risky behavior, and weaken the safeguards that keep our financial system strong.

Helping few at the expense of many

Since 1933, the FDIC has existed to insure bank deposits up to a certain limit. As of 2010, the limit has been set at $250,000, with the insurance pool funded by premiums on depository institutions.

• The FDIC notes that more than 99% of deposits are already protected under the current limit. "The primary objectives of deposit insurance are to promote financial stability and protect depositors from loss. The business of banking, which accepts deposits that are available on demand while making long-term loans, remains susceptible to runs. Deposit insurance provides assurance to depositors that they will have access to their insured funds if a bank fails, thereby reducing the risk of bank runs. As of December 2022, more than 99 percent of deposit accounts were under the $250,000 deposit insurance limit."
• The National Federation of Independent Business finds that only about one third of small business owners reported a balance higher than $250,000. "About a third (36%) of small businesses reported that in a typical calendar quarter their business's bank balance exceeds $250,000."

Higher costs for families and small businesses

Expanding FDIC insurance isn’t free. A sharp increase in coverage means higher premiums — costs that will trickle down to consumers and small businesses.

• 11 economic think tanks and nonprofits note that significantly raising deposit insurance limits, rather than creating stability, will impose higher costs and less favorable terms on consumers and small businesses. "The economic consequences are unavoidable. Financial institutions will assuredly pass these costs on to consumers in the form of higher service fees, reduced credit availability, and less favorable terms for small businesses. Far from providing stability, raising the limit risks distorting the financial marketplace by privileging large uninsured corporate accounts at the expense of individual depositors and community banks."
• Grover Norquist, President of Americans for Tax Reform, explains that the costs of a deposit insurance hike would force banks to reduce the lending that fuels economic growth. "Every dollar spent on premiums to the FDIC is a dollar not invested in economic growth. The estimated costs are huge: The FDIC would need to raise more than $10 billion from banks immediately and would take more than $1 billion in premiums out of the banking system annually. For reference, banks paid around $12 billion to the Deposit Insurance Fund in 2024. These costs will be passed on to consumers in the form of decreased lending."

Creating risk and undermining stability

When deposits are fully insured by taxpayers, banks and depositors alike have less incentive to keep your money safe.

• Dr. Lawrence McQuillan, Senior Fellow at the Center on Entrepreneurial Innovation, explains that higher deposit insurance encourages riskier behavior among banks because of the guarantee of a government backstop to losses. "Deposit guarantees generate moral hazard — riskier behavior in the banking sector. Federal deposit insurance does not guarantee bank profits, but it does incentivize executives to take socially excessive risks knowing that depositor losses will be backstopped to the limit established by the federal government."

We look forward to the conversation evolving around deposit insurance, keeping in mind that higher coverage levels may introduce added costs that would do more harm than good. Although this proposal aims to support American families and small businesses, significantly raising the deposit insurance limit is not the right solution.

For more updates like this, sign up for The Ledger Project’s emails here.