WASHINGTON, DC – AUGUST 18: The entrance to the Federal Deposit Insurance Corporation (FDIC) is seen on August 18, 2024, in Washington, DC. (Photo by J. David Ake/Getty Images)
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More federal deposit insurance will weaken banks, depositors at banks, and the U.S. economy more broadly. Say what’s true repeatedly.
To see the obvious contradiction in legislation meant to increase deposit insurance from $250,000 per account to $10 million per, simply look a little bit deeper into the details. The insurance is for non-interest-bearing accounts.
Bank accounts that don’t pay interest speak loudly to the desires of the owners of those accounts. These are generally checking accounts. Owners of checking accounts want little to no risk. Call non-interest-bearing accounts what they are: money storage for everyday spending needs, debit cards, or just paying bills.
By extension, banks logically take the desires of non-interest-bearing account holders very seriously. The money isn’t to be put at major or even minor long or short-term risk precisely because it’s expected to be easily accessible in penalty-free fashion as a consequence of no interest being paid on the funds.
It speaks to the near total mismatch of proposed federal legislation meant to increase federal deposit insurance. The legislation implies that money placed in a checking account for everyday transactions is money that banks are routinely putting at risk. No, not at all. Which once again explains the lack of interest paid. Please think about this with substantially expanded FDIC insurance top of mind.
Suddenly funds stored at banks for daily use, and that aren’t being put at risk for precisely that reason, would be federally insured as though they were. There are costs associated with such insurance. And as has been reported already, banks would be saddled with those costs through the payment of billions more into the FDIC’s insurance fund.
It means banks will suffer twice: first through higher insurance costs, and second through a reduction in profitable lending. From this, readers can hopefully deduce that a needless cost imposed on banks would be paid for via reduced economic activity thanks to lending shrunken by federally mandated increases in insurance costs.
Returning to bank depositors, to presume that they won’t pay for increased deposit insurance is truly naïve. That’s because increased FDIC insurance on non-interest-bearing accounts will logically raise the costs for banks to host those accounts in the first place. Translated, fees associated with non-interest-bearing accounts will almost certainly increase to reflect the cost of insurance for accounts that, by virtue of them not paying interest, don’t require much insurance to begin with. The average household checking balance is $5,300.
Which brings us back to the legislation itself. To say it’s a solution in search of a problem insults understatement. Only it’s much worse. Since increased deposit insurance will raise costs for banks and bank customers alike, it will bring harm to both while sapping economic vitality by reducing the availability of money for an economy reliant on it.