Are Your Deposits At Risk In A Banking Crisis? Congress Will Weigh In

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Much has been debated about whether the financial market is headed for a crash but at the heart of it, it's critical Americans know their cash is safe in the U.S. banking system. That confidence was tested after three banks failed in recent weeks, two of which prompted emergency backing by the government since most of the depositors would have been unable to access their funds without swift federal action.

The long-standing federal fund that insures deposits at failed banks risked depletion otherwise -- Silicon Valley Bank was the second largest bank failure in U.S. history and shut down abruptly after depositors fled at an alarming rate, driven by social media posts.

"Let me be clear: The government's recent actions have demonstrated our resolute commitment to take the necessary steps to ensure that depositors' savings and the banking system remain safe," said Treasury Secretary Janet Yellen at the American Bankers Association's summit in Washington, D.C., on March 21.

Still, the pressure is on for Congress to show Americans that the Deposit Insurance Fund (DIF) -- the financial backstop created in 1933 and expanded after the 2008 crisis -- can still handle much larger deposit flows in the digital age.

"This is a very, very unique situation that we're in and I think we're going to have to start thinking in different terms," said Rep. Blaine Luetkemeyer, R-Mo., in a March 22 interview on CNBC. At the time of the sudden failures, the regulators "did what they thought was necessary. They didn't really know the depth of the problem."

Lawmakers will begin to discuss the latest string of failed banks and possible changes to deposit insurance when regulators testify at a hearing scheduled for March 29 before the House Financial Services Committee.

The Federal Deposit Insurance Corp. (FDIC) oversees the DIF, which covers up to $250,000 per depositor, per account ownership type at failed banks. Banks contribute to this fund through a quarterly assessment largely based on their asset size. The fund is also supported by government investments.

In 2008, Congress expanded the DIF in response to the financial crash and raised the cap of insured deposits from $100,000 to $250,000. Last October, the FDIC also issued a final rule to raise the assessment rate banks pay to help build the fund's reserves because the reserve ratio is at risk of not reaching the statutory minimum by its deadline of Sept. 30, 2028. Prior to this month, however, not a single regulated bank had failed since 2020.

The DIF had a balance of $128.2 billion as of Dec. 31, 2022, according to the FDIC. By comparison, SVB had $175 billion in deposits when it failed on March 10, and roughly 97% of the funds on deposit were uninsured, prompting the government to offer emergency deposit insurance two days later.

"Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion," Yellen said. "I believe that our actions reduced the risk of further bank failures that would have imposed losses on the Deposit Insurance Fund, which is paid for through fees on insured banks."

Lawmakers and banking groups have floated a handful of solutions concerning deposit insurance, such as raising the cap or temporarily offering a guarantee with no cap when a large, unexpected failure happens.

Luetkemeyer, a former state bank examiner and banker himself, is calling for the government to at least offer a 30- to 60-day window guarantee, during which time all deposits of a failed bank are insured with no cap.

"If we have the problem that we think we have, this may be a short-term solution to give us time to think about it," Luetkemeyer said about the temporary guarantee. "There is a problem there."

Lawmakers on both sides of the aisle recognize the potential issue. Democratic Sen. Sherrod Brown of Ohio and Rep. Maxine Waters of California sent a joint statement to federal regulators and the Treasury Department, asking them to take steps to ensure depositors and the banking system are safe.

"As we work to better understand all of the factors that contributed to the events of the last several days and how to strengthen guardrails for the largest banks, we urge financial regulators to ensure the banking system remains stable, strong and resilient, and depositors' money is safe," said the joint statement issued on March 12. "Americans should continue to be confident in their preferred financial institutions in their communities."

The latest bank failures have also caused the industry to find ways to inject more confidence in depositors without having to wait for an act of Congress. One way is through bank partnerships in which financial institutions essentially team up and share the deposits across banks, so individuals can qualify for more than $250,000 of FDIC insurance.

On March 22, digital bank SoFi said its checking and savings members can now get up to $2 million of their deposits insured through a network of banks that have FDIC insurance. Members would have to opt into the program, but SoFi would essentially spread a customer's excess deposits across the network. On March 24, Wealthfront, an automated investment service platform that works with a similar banking network, increased its FDIC coverage limit to $3 million.