Proposed New FDIC Limits Could Protect More of Your Money From Bank Failures
In a rare moment of bipartisan accord in Washington, D.C., Sen. Elizabeth Warren, D-Mass. — an often-vocal critic of the banking industry — and Treasury Secretary Scott Bessent are crossing the aisle to significantly raise the coverage the Federal Deposit Insurance Corporation extends to customers’ bank deposits.
One bipartisan proposal, the Main Street Depositor Protection Act, would provide expanded deposit insurance coverage of up to $10 million per depositor for non-interest-bearing transaction accounts. Another proposal would increase deposit insurance to $20 million, but only for business checking accounts, and only at banks with $250 billion or less in assets.
Either would be a major jump: FDIC insurance currently covers customers so they won't lose money in the event of a bank failure up to $250,000 per depositor, per ownership category, per bank.
"I would say it’s a bit overdue," says Alexander Yokum, an equity research analyst at CFRA, an investment research firm.
The limit hasn't been adjusted for inflation even though the aggregate value of bank deposits has grown significantly, he adds. While more than 99% of bank accounts hold less than $250,000, about half of bank deposits — a whopping $7 trillion in total — aren't covered by FDIC insurance.
There’s historic precedent for an increase. Officials lifted the limit in 2008 by $150,000. Market observers like Luke Lloyd, president and CEO of Lloyd Financial Group, say now is the time for another update.
“The $250,000 limit was raised during the financial crisis and hasn’t moved since, despite inflation, higher home prices and larger business payrolls,” Lloyd says in an email. “It’s time to modernize coverage so it reflects today’s financial realities.”
Small and medium-sized banks say increasing deposit insurance would help them hang onto skittish customers during periods like the 2023 collapses of Silicon Valley Bank, Signature Bank and First Republic Bank. The Independent Community Bankers of America, a small-bank trade group, sent a letter in support of the Main Street Depositor Protection Act to lawmakers, calling it a “great step” that would benefit small banks and their customers.
A initiative to raise the $250,000 cap in the wake of those 2023 bank failures stalled out, but today’s invigorated campaign might have enough momentum to go the distance. Bessent’s support is a big plus; although lawmakers will do the heavy lifting, executive branch buy-in sends a signal to legislators and lobbyists alike.
At a Federal Reserve community banking conference last month, Bessent said the goal was “leveling the playing field” for small banks, which people view as riskier than their “too big to fail” counterparts.
According to Chris Nichols, director of capital markets at SouthState Bank, headquartered in Winter Haven, Fla., bank customers wouldn’t have to be wealthy to benefit from a higher FDIC limit: “What it does is protect our community banking environment in the U.S., which is critical to keeping capital close to our communities,” he says via email.
It could also give customers more choices by slowing consolidation in the banking sector. The number of small banks has dropped by 45% over the past 15 years.
Even though the typical American might not have anywhere near $250,000 in their bank account, increasing the FDIC limit would provide indirect benefits, Lloyd says.
"When wealthy individuals and small businesses worry about deposit safety, they naturally move cash to 'too big to fail' institutions," he explains. "That drains liquidity from regional and community banks that fuel local economies. Increasing FDIC coverage keeps capital in local communities — the lifeblood of small business lending."
Despite bipartisan backing, though, this push faces resistance from banking behemoths. The Wall Street Journal characterized the prospect of higher deposit limits as “a nightmare scenario for the nation’s biggest banks."
Advocates for less government regulation argued in a joint letter to lawmakers on the Senate Banking Committee that a change to the current deposit insurance limits would be unfair to big banks, which would bear the lion’s share of the cost of higher FDIC limits. (Deposit insurance is paid for by the banks, not taxpayers or bank customers.)
Opponents of increasing consumers’ and small businesses’ deposit insurance also warn of the possibility for “moral hazard,” predicting that more generous insurance limits would encourage banks to take greater risks with customers’ dollars. But proponents of a higher limit argue that the so-called “too big to fail” institutions already enjoy this kind of coverage on an unofficial basis. Megabanks like JPMorgan Chase benefited in 2023 when spooked customers yanked their money out of small banks — $119 billion in a single week — because there was an implicit expectation that the government would step in and backstop or bail out big banks, as it did during the financial crisis.
Critics have also suggested that big banks might recoup the higher FDIC premiums raising the limit would require by reducing services and hiking fees for bank customers. CFRA's Yokum acknowledges the likelihood that banks, especially the big banks picking up most of the tab for higher deposit coverage, would pass along the costs to customers. That likely means lower interest rates for deposits and higher rates for loans.
On the other hand, higher FDIC insurance could make smaller banks more competitive, giving consumers more choice, he says.
"Big banks aren't exactly known for offering customized services for your specific needs," he says. "Helping out the little guys would be good because if they perform better, they can compete better."
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