FDIC Insurance: To Infinity and Beyond!

In the wake of two major bank failures, Federal Deposit Insurance Corporation (FDIC) deposit insurance effectively went to infinity. And there is no reason to believe it will be temporary.

As Silicon Valley Bank and Signature Bank were toppling, the government rushed in to guarantee 100 percent of both banks’ deposits. It was touted as an emergency measure to maintain confidence in the banking system and prevent runs at other banks. In effect, it bailed out wealthy depositors at two failing banks.

As it turns out, some US officials wanted to expand 100 percent FDIC insurance to every American bank. And they were trying to figure out a way to do it while bypassing Congress.

By law, the FDIC insures all bank deposits up to $250,000. But there were a lot of accounts in both SVB and Signature Banks above that threshold. Under a Treasury Department plan, bank customers didn’t lose one dime – and that includes their uninsured deposits of over $250,000

On the Sunday after government regulators took over the two failing banks, the FDIC created “bridge banks” to handle both insured and uninsured customer deposits. Banking regulators assured depositors that they would have full access to all of their funds.

In a podcast right after the banks collapsed, Peter Schiff said the government effectively raised FDIC protection from $250,000 to infinity.

They just set the precedent. I know they haven’t codified it into law. But they just set the precedent of bailing out the depositors of these two banks.”

Not only did they set the precedent; sources say government officials were almost immediately trying to figure out how to expand 100 percent deposit insurance to every bank in practice. The problem is only Congress has the authority to raise the FDIC insurance limits.

Under current law, federal regulators are supposed to go to Congress when they determine a “liquidity event” requires an increase in the amount the government will guarantee.

Never people to let constitutional limits on their power get in the way, officials reportedly discussed how to increase deposit insurance without having to deal with a sharply divided Congress.

Reuters cited one source who said government officials were almost immediately scheming, floating the idea of using the Treasury Department’s Exchange Stabilization Fund to backstop bank deposits. But there were concerns over expected criticism from Congress and questions about the legality of the plan.

A second source said that while officials discussed a temporary solution without congressional approval, they conceded that any permanent action would require an act of Congress.

A third source told Reuters the discussions quickly cooled because the administration “does not view the move as necessary because it has tools to support community banks.”

Nevertheless, the fact that government officials were actively discussing bypassing Congress and trying to guarantee every dime of US bank deposits reveals the extent of the banking crisis and just how desperate they got.

And it’s clear extreme measures aren’t off the table even though things seem to have stabilized for the moment. As an analyst told Bloomberg, “Studying this option tells you they have not drawn a line in the sand. They are not saying they will not go to that extreme.”

Meanwhile, Treasury Secretary Janet Yellen made it clear that the depositor bailout wasn’t just about two failing banks. In a statement, she said, “The steps we took were not focused on aiding specific banks or classes of banks. Our intervention was necessary to protect the broader US banking system.”

She went on to say, “Similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion.”

Congress could still step in. Sen. Elizabeth Warran and other members of Congress have expressed a willingness to raise FDIC insurance limits. Warren was asked how high the limits should go.

This is a question we’ve got to work through. Is it $2 million, is it $5 million? Is it $10 million? Small businesses need to be able to count on getting their money to make payroll, to pay the utility bills.”

But as Schiff pointed out, the precedent has already been set. How can they let depositors lose money when the next bank fails when they’ve shown a willingness to bail them out?

In effect, FDIC insurance now goes to infinity.

President Biden and others insist that these bailouts won’t cost Americans a dime. But as Schiff pointed out in an interview, this is simply untrue.

This is going to cost Americans a lot of money, not because their taxes are going to be raised, but because the Federal Reserve is financing this massive bailout by creating even more inflation. So, Americans are going to pay for this at the supermarket, at the gas station. Their cost of living is going to go way up. If you thought inflation was bad last year, it’s about to get a whole lot worse.”