Wed, May 03, 2023 page10

• Raise insured deposit limit, US’ FDIC says

  SOLUTIONS NEEDED: Federal Deposit Insurance Corp is likely looking for ways to calm depositors and markets after First Republic Bank became the third bank to fail this year

  • AP, NEW YORK
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  US businesses might be able to secure bank deposit insurance for accounts holding more than US$250,000 if the US Congress agrees with Federal Deposit Insurance Corp’s (FDIC) proposal to ease the industry turmoil that has sparked three bank failures in the past two months.

  The FDIC recommended the change on Monday, rethinking the decades-old limit and seeking more flexibility to cover higher deposits on a “targeted” basis.

  Raising the insurance limit for business accounts that pay for company operations such as payroll would shore up accounts that pose the most risk to financial stability, the FDIC said.

  The proposed change appears to openly acknowledge that the FDIC is looking for ways to calm depositors and markets as the agency contends with the third bank run this year.

  First Republic Bank became the second largest failure in history on Monday when regulators seized it and JPMorgan Chase & Co stepped up as a buyer.

  “The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system,” FDIC Chairman Martin J. Gruenberg wrote in a statement accompanying the regulator’s recommendations.

  As of December last year, more than 99 percent of US deposit accounts held less than US$250,000, and so were automatically covered by existing FDIC insurance, Gruenberg said.

  However, the system remains subject to the sort of bank runs that brought down First Republic, despite a consortium of big lenders having pooled US$30 billion in cash to stabilize the bank as recently as March.

  US Representative Patrick McHenry, who leads the US House of Representatives Financial Services Committee, issued a statement on Monday saying that the FDIC “used its available tools to resolve First Republic Bank,” but he did not immediately address the agency’s recommendations for change.

  In seeking additional powers to insure business accounts, the FDIC said technological advances hasten the speed of information and let depositors quickly take their money elsewhere at the first sign of trouble.

  Both factors can spur “faster, and more costly, bank runs,” the agency said.

  However, insuring more deposits doesn’t come without a downside. Deposit insurance can encourage banks to take on greater risk if they know their deposits are covered.

  Targeted coverage to protect businesses would be the most cost effective way for regulators to meet their stability objectives, Gruenberg said.
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