FDIC calls for major deposit insurance reforms

The Federal Deposit Insurance Corporation (FDIC) wants to make changes to deposit insurance in the wake of the collapse of First Republic Bank.

The regulator on Monday 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 he said strong regulation and supervision could alleviate those concerns.

Gruenberg said 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,” he said. 

First Republic on Monday became the second-largest U.S. bank to collapse. The FDIC seized control of the San Francisco-based lender, which had $230 billion in assets as of last month, and orchestrated its sale to JPMorgan Chase. 

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 other regional lenders could be targeted next.

Midsize banks reportedly urged the FDIC to insure all deposits for two years to stop the outflow of deposits to larger banks. 

Sen. Elizabeth Warren (D-Mass.) called for raising the FDIC cap in March, stating it could be as high as $10 million. She noted the system would rely “even more heavily on the regulators to do their jobs” if Congress lifts the cap. 

The House Freedom Caucus came out against raising the insurance limit, however. The group of conservative lawmakers said a higher FDIC cap “simply encourages future irresponsible behavior to be paid for by those not involved who followed the rules.”

Updated at 9:19 a.m.