The Silicon Valley Bank’s collapse in early March has made investors and depositors nervous. Could their money be at risk while in the bank?
Now some lawmakers are pushing for an increase in the amount of deposits insured by the federal government.
The U.S. government currently insures bank deposits up to only $250,000. Lifting that cap, some lawmakers say, could stop depositors whose accounts exceed the $250,000 limit from pulling their money out of smaller financial institutions that seem more likely to crash without a government rescue. This would not only reassure the public, but also ease the pressure on the small banks and by extension, the entire banking system.
Some lawmakers, including Senator Elizabeth Warren, Democrat of Massachusetts, have suggested lifting the deposit cap altogether, while others including Representative Ro Khanna, Democrat of California, are pushing to introduce bipartisan legislation that would increase the deposit cap, at least temporarily, on transaction accounts, which are used for activities like payroll, with an eye on smaller banks.
Of particular concern is “the danger to regional banking and community banking in this country,” Mr. Khanna said. He noted that if regional banks lose deposits as people turn to giant banking institutions that are deemed too big to fail, it could make it harder to get loans and other financing in the middle of the country, where community and regional banks play a major role.
While the move to raise the $250.000 cap could help to calm nervous depositors, it is not without risk: it could also remove a big disincentive for banks to take on too much risk.
Such a move would potentially reprise a playbook used during the 2008 financial crisis and authorized at the onset of the coronavirus pandemic in 2020 to prevent depositors from pulling their money out.
