Universal Deposit Insurance: The Federal Deposit Insurance Completion Act Of 2023

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(Original Caption) General view of the crowd outside of the East New York Savings Bank during the … [+] run on that bank.
Eighteen years ago, the US modernized its by-then-anachronistic system of federal bank deposit insurance. With the Federal Deposit Insurance Corporation Improvement Act of 2005, Congress ended the earlier, 1933-vintage method of funding the Deposit Insurance Fund (DIF) with risk-indifferent, ad hoc assessments levied only when the Fund fell below certain threshold amounts, replacing it with a modern, risk-priced premium model of the kind used by efficient insurance companies for centuries.
The old system had been perversely procyclical and hence destabilizing, since the DIF tended to fall only during time of correlated bank failure; and prone to moral hazard, not to mention injustice, in virtue of pricing insurance identically both for risk-embracing and risk-avoiding banks. The new system helpfully ended all that, and modern deposit insurance at last came of age.
Almost.
While the move to regularly assessed, risk-priced premia ended the earlier regime’s systemically destabilizing procyclicality and justly all but eliminated moral hazard, it left one other feature of the ancien regime – coverage caps – untouched. This was a mistake – a mistake that is now proving both costly and, ironically, itself now quite dangerously anachronistic.
First, the mistake: The FDI coverage cap is vestigial – a sort of financial counterpart to the human tailbone. For what originally prompted it was precisely the lack of risk-priced premia under the 1933 regime. With the change of the latter regime, the cap regime became quite superfluous – a merely gratuitous foreswearing of needed and easily affordable coverage.
Next, the danger: at this point the cap regime has grown worse than unnecessary – it is positively perverse. The March 2023 collapse of Silicon Valley Bank (SVB VB ), a de facto tech sector credit union, dramatically showed what’s at stake, as I have outlined in two prior columns over the past several days. The SVB debacle wasn’t solvency-rooted or even risk-rooted in much more than a trifling sense. It was all about self-fulfillingly prophetic, not fundamental, liquidity risk – precisely what FDI was established to short-circuit and end.
With the our nation now embarked once again on a grand project of industrial renewal along green-friendly lines, sector-specific industrial banks of the SVB variety, which once flourished during our earlier industrial ages, will come into increasing demand. For they offer specialized banking attuned to the needs of distinct regions and industries of our continent-sized nation’s economy.
We should be welcoming and indeed fostering this development as a colossal and sorely needed reversal of the catastrophic deindustrialization, ‘financialization,’ homogenization, and banking concentration of the past 40 years, which have all but obliterated our nation’s productive capacities and, with them, the economic, political, and social foundations of our republic, not to say national security.
The problem we face in this needed and welcome transformation, however, is that industrial firms typically have large operating budgets and payrolls, meaning that transaction accounts limited to $250K are grossly inadequate – ‘chump change’. Firms are accordingly forced either (a) to embrace uninsurable risk in the form of large uninsured bank deposits, or (b) to resort to systemically destabilizing or sector-indifferent ‘shadow banking’ markets or generic one-size-fits-all Wall Street megabanks.
Far better than confronting new industrial firms with this quandary – and far more in keeping both with our pre-21st century banking traditions and bank concentration (antitrust) concerns – would be fostering the spread of safe, ‘boring’ industrial banks and credit unions again every region and sector of our nation and its economy. Such was the vision of Hamilton, Jefferson, and our other founders, not to mention Lincoln, Brandeis, FDR and other heroes of broad-based American industry.
I have accordingly drafted legislation aimed at accomplishing these ends.
A few simple tweaks – removal of caps, continuation of risk-priced premium assessment, and allowance of small surcharges on accounts over $250K – are all that is requisite. Shareholders, managers, and subordinated creditors will of course remain uncovered, and subject to ‘clawbacks’ of and prosecutions for suspiciously timed stock sales or disbursements to non-depositors.
And it is all specifiable in only a few pages of legislative text. It’s also now before Members of Congress in both Chambers on both sides of the aisle – a simple and overdue bicameral, bipartisan modernization of the nation’s system of bank deposit insurance.
Make this simple change to the Federal Deposit Insurance System now, while the proverbial iron is ‘hot,’ and in a stroke we will both foster the nation’s nascent industrial renewal and obviate the need of any future bank ‘bailouts’ or further Fed ‘facilities’ bearing acronyms ending in ‘F.’