Senate Bill to Raise Deposit Insurance Limit Is Risky and Costly

The debate over raising the federally insured deposit limit has been heating up following the failure of Silicon Valley Bank and Signature Bank, even though doing so would increase risk and moral hazard, and the banks’ demise was unrelated to the insurance cap.  The Federal Reserve’s April 28, 2023, review of its supervision of Silicon Valley Bank determined that the proximate cause of the bank’s failure was lack of oversight of its business model by senior management and the board of directors; failure to manage liquidity risk or anticipate the potential for higher interest rates; and too many uninsured accounts.  The report concluded that Silicon Valley Bank was an outlier in an otherwise sound and resilient banking system that has adequate liquidity and capital and suggested that increased supervision by the Federal Reserve could help prevent a similar bank failure in the future.

Instead of accepting this comprehensive solution to an isolated problem, members of Congress are moving ahead with a proposal to increase the Federal Deposit Insurance Corporation (FDIC) deposit insurance limit for non-interest-bearing transaction accounts.  On September 9, 2025, Sens. Bill Hagerty (R-Tenn.) and Angela Alsobrooks (D-Md.) introduced S. 2999, “The Main Street Depositor Protection Act,” which provides $10 million more in deposit insurance for noninterest-bearing accounts.  The co-sponsors claim it would increase stability for small and mid-sized banks that help economic growth in local communities.  Sen. Alsobrooks said she wanted “small businesses in Maryland and across the country to have security in the event of another Silicon Valley Bank crash.”  Neither senator mentioned that the cause of that bank failure was unrelated to FDIC deposit limits.  Like many other well-intended yet wasteful legislative initiatives in Congress, they are trying to solve a problem that does not exist.

The FDIC’s mission includes maintaining “stability and public confidence” in the U.S. financial system by insuring deposits and supervising the safety and soundness of financial institutions.  The FDIC’s role in bank failures is after the fact, while the Federal Reserve’s supervision is supposed to help prevent the FDIC and sometimes taxpayers, from having to cover the cost of uninsured deposits if a bank fails.

Despite repeated claims that there would not be more bailouts after 2008, Silicon Valley and Signature proved that to be a hollow promise.  Raising or eliminating the deposit limit would make it even more likely that banks would take more risks and increase moral hazard, leaving taxpayers open to more multi-billion-dollar bailouts.

Boston College Law School Professor Patricia A. McCoy pointed out in her February 18, 2007, analysis of the moral hazards of deposit insurance that bank crises increase based on the relationship of coverage to a country’s gross domestic product.  The increase of deposit insurance from $40,000 to $100,000 in 1980 made it equal to nine times per capita GDP, and “countries with over four times per capital GDP are five times more likely to suffer bank crises than countries with coverage of under one time per capita GDP.”  In other words, lower, not higher, insurance limits reduce moral hazard and force creditors to more closely review the business practices of the banks with which they do business.  And she published her paper one year before the 2008 banking crisis, after which the deposit insurance limit was raised to $250,000.

Senate Banking, Housing, and Urban Affairs Committee Chairman Tim Scott (R-S.C.) said at the September 10, 2025, hearing on deposit insurance reform, that any changes should “not be based on rush decisions.”  Yet Sens. Hagerty and Alsobrooks attempted to add S. 2999 (which does not have a House companion bill) as an amendment to the National Defense Authorization Act for fiscal year 2026.  The potential exposure of taxpayers to billions of dollars in bank bailouts should not be thrown into any bill without the opportunity for debate and amendments on the floor of the Senate and House.  Fortunately, the effort was rejected, and the bill should be as well should it proceed beyond any committees.