Larry Lambert is a Democrat serving Claymont in the House of Representatives.
Following the end of the 2008 financial crisis, Congress passed the largest overhaul of the U.S. financial regulatory system since the Great Depression. The Dodd-Frank Act ushered in a new wave of reforms aimed at protecting consumers and preventing another financial crisis of that scale.
Included in it was a permanent expansion of the Federal Deposit Insurance Corp. deposit insurance limit from $100,000 to $250,000. Now, more than 15 years after the passage of Dodd-Frank, there are yet again calls to increase deposit insurance. The only difference this time is that those calls aren’t tied to other regulatory reforms.
The failure of Silicon Valley Bank and the subsequent actions to guarantee all deposits, regardless of size, raised questions about whether the nation’s existing deposit insurance limit is sufficient. Some lawmakers, including Sen. Bill Hagerty, R-Tenn., don’t believe that it is.
Their solution: the Main Street Depositor Protection Act (Senate Bill 2999), which would increase deposit insurance from $250,000 all the way to $10 million. The theory behind this is that it would prevent a situation like what happened at Silicon Valley Bank from unfolding again and provide small businesses more stability, knowing that, even in tough economic times, their deposits would be secure.
But what this would look like in practice is far different.
In the lead-up to the 1980s savings and loan crisis, Congress opted to raise the deposit insurance limit by 150%, from $40,000 to $100,000. What followed was immense moral hazard, the failure of more than 700 banks and the loss of hundreds of billions in taxpayer dollars.
The increase in deposit insurance incentivized riskier investments by banks, knowing that their deposits were guaranteed. At the same time, it disincentivized large, sophisticated depositors from monitoring their banks, since they similarly knew that their funds were fully insured.
According to the FDIC, 99% of deposit accounts are already fully insured under the current $250,000 limit. To bolster small-business and account holder confidence, a deposit insurance increase of 400% to $1 million or 800% to $2 million would be reasonable and more than fair. But a 4,000% increase to deposit insurance, as what’s being proposed in the Main Street Depositor Protection Act, is a direct path to repeating history.
Silicon Valley Bank’s failure was not caused by the deposit insurance limit but rather by poor risk management and lapses in regulatory oversight. Increasing the deposit insurance limit would not have solved the broader problems within the bank.
And an increase this substantial will not prevent bank failures in the future. Rather, it will increase the risk of a greater number of failures in the years to come. This legislation would remove all levers of market discipline, which help to guarantee the stability of our banking system. Large depositors monitor their banks, and in turn, banks manage their money responsibly, knowing that failing to do so will cost them customers.
At the same time, it will burden working families across America. As banks pay increased premiums, those added costs will trickle down to consumers. Here, in Delaware, my constituents would have a more difficult time securing an affordable loan for a new car or a new house.
It’s worth considering reforms to the deposit insurance system, but any reform must be paired with comprehensive regulations to ensure that the kind of regulatory failure we saw in Silicon Valley cannot repeat itself more broadly across the system. This is even more urgent at a time when the Trump administration is actively scaling back the authority and independence of inspectors general, weakening one of the most important oversight mechanisms we rely on to prevent abuse, mismanagement and regulatory failures.
Congress should push back against this reckless expansion proposal. The Main Street Depositor Protection Act is not solving problems; it’s creating new ones.
Reader reactions, pro or con, are welcomed at civiltalk@iniusa.org.
