First Republic Bank, which had $230 billion in assets as of last month, on Monday became the second-largest U.S. bank to collapse. The FDIC seized control of the San Francisco-based lender and orchestrated a sale to JPMorgan Chase.
Three of the four largest bank failures in U.S. history occurred in the last two months, after Silicon Valley Bank and Signature Bank went under.
In all three cases, the FDIC chose to protect all deposits above the $250,000 insurance limit — using emergency authority to boost confidence in the financial system and quell future bank runs.
Now, the FDIC wants to make changes to deposit insurance. The regulator proposed three options: raising the limit to a higher number, eliminating the cap entirely or raising the insurance cap only for banks’ business accounts, which are used to pay workers.
The FDIC would need Congress to pass legislation to make any of those changes. Lawmakers last raised the FDIC cap after the 2008 financial crisis.
FDIC Chairman Martin Gruenberg acknowledged Monday that expanding deposit insurance has the potential to “create moral hazard by providing an incentive for banks to take on greater risk” but said that strong regulation and supervision could alleviate those concerns.
Gruenberg said that expanded deposit insurance for business accounts has the “greatest potential for meeting the fundamental objectives of deposit insurance relative to its costs.”
“Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects,” Gruenberg said.
Regulators are seeking to stem the crisis of confidence in the banking system that caused depositors to pull their funds from midsize banks that had a high rate of uninsured deposits. Some fear that other regional lenders could be targeted next.
