Congress Should Let the FDIC Cap Debate Die Already

Norbert Michel

In Washington, there’s no shortage of bad policy ideas that just won’t die. The latest example is the “Deadpool-esque” quest to lift the cap for Federal Deposit Insurance Corporation (FDIC) deposit insurance.

The latest round includes a flurry of activity in the House and a new bill in the Senate, along with support from the Trump administration.

In the Senate, Senators Bill Hagerty (R‑TN) and Angela Alsobrooks (D‑MD) are set to introduce a new bill that would give the FDIC six months to choose “a deposit insurance cap between $250K & $5M instead of setting it at $10M.” 

Lifting the cap is bad enough, but setting those problems aside, this new bill is a retreat from last fall. Back then, Hagerty and Alsobrooks cosponsored a bill to raise the FDIC coverage limit from $250,000 to $10 million, with no choice in the matter for the FDIC, for noninterest-bearing transaction accounts. (The administration signaled support back then too.) 

Under the leadership of Representative French Hill (R‑AR), the House Financial Services Committee held a hearing, and it was clear that there was nothing close to a consensus for raising the cap. During the hearing, the chairman expressed the importance of only passing a bill through regular order, members introduced all kinds of other reforms, and it became crystal clear that many community bankers were against raising the cap. 

Now, four members of the Financial Services Committee have introduced bills, one of which, by Representative Frank Lucas (R‑OK), serves as the House companion to the Hagerty–Alsobrooks bill. The folks at the FDIC can’t possibly be happy with this approach, one that essentially punts the decision to them—they must raise the cap, but only after going through the rulemaking process to figure out how high. The only good thing to say about this approach is that at least the public will know exactly who wants the cap raised.

This policy issue is simple. Expanding FDIC deposit insurance does not help Main Street Americans, even if members of Congress call their bill the “Main Street Depositor Protection Act.”

Several members (and the administration) have tried everything imaginable to justify this increase, but nothing has stuck because hardly anyone needs a higher cap. Less than 1 percent of bank accounts have more than the current FDIC insurance limit. The typical American—even the typical wealthy American—simply doesn’t have anywhere near $250,000 in a bank account. 

And those who do have more can already avoid getting stuck with uninsured balances by spreading their accounts around, as well as by using reciprocal deposit networks and “sweep” accounts. So-called small businesses with payroll accounts have the same options.

The FDIC system was the original sin in the banking sector. It’s been used for decades to justify increased federal involvement in banking, and it crowds out private insurance solutions that could provide more widespread benefits to Americans.

Raising the cap is a solution in search of a problem. Main Street depositors do not benefit from raising the cap, and Congress would do well to finally let this idea die.

This was cross-posted from Norbert Michel’s Substack, Mind the Gap.