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Bailout To Raise FDIC Limit To $250,000

The proposal for raising the FDIC insurance limit to $250,000 has immediate benefits for small and midsize businesses. But there are hidden risks as well.
The proposal for raising the FDIC insurance limit to $250,000 has immediate benefits for small and midsize businesses. But there are hidden risks as well.On the plus side, the proposed increased in FDIC insurance of bank deposits from $100,000 to $250,000 will provide security to many small and midize businesses, who keep money in banks for various purposes, often including payroll payments.

The New York Times quotes Cam Fine, the head of the Independent Community Bankers of America: "potentially the biggest impact would be on small-business customers, which often must have more than $100,000 in cash to meet payroll requirements and other needs. If the insurance coverage is increased to $250,000, about 68 percent of all small-business deposits will be insured, according to Oliver Wyman data. Today, about 51 percent of small-business deposits are protected." That's a total of some $700 billion of newly insured deposits.

But the Times also says that "others question how much the measure will really help. One reason is that customers most likely to pull their money tend to be midsize corporations that keep more than $250,000 in cash in an account."

Either way, the change raises some important questions:

Question 1. Who's going to pay for it? The FDIC's coffers are already depleted. Unless the premiums banks pay to the FDIC are raised, taxpayers could be on the hook for even more massive bank takeovers. And if bank premiums do go up, that puts even more pressure on the beleagured banking system.

According to the Wall Street Journal: "Paul Hastings partner John Douglas, who is a former general counsel of the FDIC opposes increasing the FDICs deposit cap. I think it increases the risk of the deposit insurance fund at a time when its not particularly healthy."

Question 2: Is this just another encouragments for banks to gamble? One of the reasons we're in this mess is that banks have their money guaranteed by the Feds, and yet the restrictions on how they invest have pretty much all been lifted. Raising the deposit insurance limits just encourages them to take more risks with larger amounts of money, which could put us in an even worse situation down the road. Fine also told the Journal that keeping the cap at $100,000 encourages market discipline among the banks.

Given the stakes, raising the limit -- especially temporarily -- is probably a good idea. But let's hope Congress takes some action to make banks act like banks, not riverboat gamblers.