Should deposit insurance be expanded? About 40% of deposits, by value, are uninsured because they exceed the $250,000 that the government guarantees
people do not give it a second thought: they put their money in a bank and trust that it is safe. But every once in a while, a crisis shakes that faith. Thein America over the past month has been one such moment. Savers have moved their cash to bigger banks; the government has scrambled to reassure them. Most people have little to fear: so long as their accounts have deposit insurance, their money is guaranteed even if their bank collapses.
The cap for insurance coverage has steadily risen. In 2008, during the global financial crisis, Congress raised the limit from $100,000 to $250,000, where it stands today. That is sufficient for the vast majority of Americans. But some business accounts exceed that limit—to make monthly wage payments, for instance. So do some individuals. Just like savers in the 1930s, they have a motivation to shift funds elsewhere if their bank looks wobbly.
Critics also worry that unlimited insurance would erode financial discipline, because banks might take greater risks knowing that their clients would not flee. Republican lawmakers have been especially concerned about this “moral hazard” danger. Supporters of unlimited insurance counter that the problem can be overstated. Blanket coverage could be coupled with stricter rules about how banks operate. Moreover, banks would still go bust if they made rotten business decisions.
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