Higher Deposit Insurance Limits Will Make Banking More Risky, Not Less

The Federal Deposit Insurance Corporation headquarters in Washington, DC. (KAREN BLEIER/AFP/Getty Images)

About the authors: Aaron Klein is the Miriam K. Carliner chair and senior fellow at Brookings Institution. He served as U.S. deputy assistant secretary of Treasury from 2009-12. Jill Castilla is president and CEO of Citizens Bank of Edmond.

We come from opposite corners of America’s financial system. One of us runs a community bank in Oklahoma. The other is a former Treasury official-turned-academic economist. We often disagree on the role of government in banking, but we agree on this: The U.S. should not rush to drastically raise Federal Deposit Insurance Corporation’s deposit insurance.

A bipartisan group of senators proposed legislation in October to increase banks’ deposit insurance limits to as high as $10 million. The proposal is gaining steam, with Treasury Secretary Bessent signaling his support. The idea of expanding the government’s safety net may sound like a reasonable measure to prevent bank failures. But we are concerned that a higher deposit insurance limit increases systemic risk in our financial system and shifts costs to the same Main Street institutions that the plan claims to help.

The current deposit insurance limit of $250,000 covers 99% of bank and credit union accounts. For the few customers who need greater coverage, well-established tools to do so already exist. That includes reciprocal deposit networks, Federal Home Loan Bank letters of credit, and collateralized deposits, all of which allow financially sound banks to provide millions of dollars in insured coverage. These tools provide ample insurance to those who want it and are willing to pay for it. It is a balanced market system.

The case for a higher deposit insurance limit is framed as an answer to incidents like the Silicon Valley Bank collapse in 2023. SVB banked tech giants and venture capitalists, resulting in a wild balance sheet with extraordinary levels of uninsured deposits. Mismanagement by the bank and its depositors led to the bank’s failure: SVB ignored the tools that could have mitigated the risks of holding uninsured deposits.

Banks of all sizes can manage large depositors safely if they choose to be prudent. Citizens Bank of Edmond, which Jill runs, is a small community bank that can provide more than $200 million in deposit insurance for a single customer, using conventional market tools. Banks that utilize these systems bear the cost, as opposed to a deposit insurance system where the costs of failed banks are spread among all banks and, ultimately, all taxpayers.

The Senate proposal would also extend $10 million in coverage to credit unions, which have long shared similar deposit insurance limits as banks, albeit backstopped by separate funds. Credit unions are already exempt from taxes, laws governing investment in their community, and a variety of regulations and oversight that banks must comply with. Providing multi-million-dollar deposit insurance coverage to these institutions would expose the National Credit Union Share Insurance Fund to risks it was never designed to bear.

In traditional banking, deposit insurance increases are sometimes pitched as a way to help small businesses deal with their payroll. Yet 80% of businesses have fewer than 10 employees, and their entire payroll fits comfortably within the existing $250,000 insurance limit.

One business that banked with SVB was the streaming tech company Roku. It had about $500 million in deposits and approximately 3,000 employees, which translates into a biweekly payroll of about $7.5 million, using average national salaries. Is that the type of “small business” that deposit insurance should be designed to protect?

Big companies have executives whose job is to look after the company’s money. We want a banking system built on trust and quality, not on promises of Uncle Sam’s bailouts.

And limiting higher insurance to only non-interest-bearing accounts will encourage risky gaming. History shows this to be true. The 1980 increase in deposit limits from $40,000 to $100,000 helped fuel the savings and loan crisis. Banks took greater risks, knowing deposits were protected. Taxpayers ultimately shouldered the price, paying over $130 billion, plus hundreds of billions in interest payments over decades, according to the Government Accountability Office.

When losses are socialized, market discipline fades. Institutions that manage risk prudently are at a competitive disadvantage to those that chase yield.

Deposit insurance was last raised during the height of the 2008-09 financial crisis. It was a political calculus to gain support to pass the Troubled Asset Relief Program bailout. That decision was made in an emergency without economic analysis. No such emergency exists today. We can afford to be guided by thoughtful analysis and thorough public debate.

Policymakers haven’t conducted cost estimates or impact analyses, despite the fact that increased deposit insurance would expand federal exposure by trillions of dollars.

That leads to another issue: With trillions more of taxpayer dollars at risk, banks should expect tighter supervision and new reporting demands. More coverage leads to greater oversight. This should give pause to those who think they can get greater deposit insurance from the federal government without greater government involvement in their bank.

The U.S. financial system is strongest when trust naturally flows from the bottom up. Confidence in this system is earned by bankers who know their customers and have to face market discipline. A stronger system will not come from insuring every dollar, but from holding risk-takers accountable and empowering banks that serve their communities.

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