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Scrap the Bank Deposit Insurance Limit

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Scrap the Bank Deposit Insurance Limit

Opinion | by Lev Menand and Morgan Ricks 

Washington Post – March 15, 2023 at 7:15 a.m. EDT

On Sunday evening, in an effort to stem a damaging financial panic, the Federal Deposit Insurance Corporation (FDIC) overrode a $250,000 cap on deposit insurance set by Congress and committed billions of dollars to rescue uninsured depositors at two failed banks, including Silicon Valley Bank. The rescue required the treasury secretary, Janet L. Yellen, to invoke the “systemic risk exception,” which allows the FDIC to bypass the ordinary rules of bank failure when following them would have “serious adverse effects on economic conditions or financial stability.”

While this might have averted a run on other U.S. banks, it also reveals that the deposit insurance system is broken. At this point, the $250,000 cap is illusory. Worse, it is window dressing, part of a tale bankers and others tell about their institutions — that they are more like private businesses than public utilities — which obscures the reality of what banks do and the essential role the government plays in their operation.

The time has therefore come for Congress to scrap the $250,000 cap on deposit insurance coverage, strengthen regulatory oversight accordingly and charge banks much more for operating a government-backed deposit business. Specifically, Congress should say that when the deposit insurance fund is fully funded, banks’ deposit insurance fees go to the Treasury Department as fiscal revenue — rather than being waived as they are under current law.

Read more. [links to Washington Post article]