Should the $250,000 limit on deposit insurance be lifted? The federal bailout of depositors at Silicon Valley Bank highlights the potential need for a dramatic overhaul of the U.S. deposit-insurance system and banking regulations.
The federal bailout of depositors at Silicon Valley Bank was organized with historic speed and may have saved the U.S. economy from a devastating wave of bank failures, but it also highlights the potential need for a dramatic overhaul of the U.S. deposit-insurance system and banking regulations more broadly.
Of course, nobody thought the failure of a midsize regional bank posed a risk to the entire U.S. economy until last week, and it would be reasonable to expect that regulators in the future may lean on the systemic-risk exception in the law to once again justify protecting the hard-earned savings of U.S. individuals and businesses.
Robert Hockett, who teaches monetary law and economics at Cornell Law School, argues that because lawmakers reformed the FDIC system so that it was funded with risk-based pricing, lifting the cap entirely would be relatively easy. “A lot less money would flow into the shadow banking sector, and that’s a good thing,” he said, noting that the opacity of the shadow banking system makes it difficult for regulators and counterparties to gauge its financial health.
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