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FDR didn't have unlimited coverage for bank deposits. Why does Biden suggest it?

Wait a minute. It's on the tip of my tongue. I'm very close. Ahhh, because he's a moron.


While he's at it, I think he should insure my investment in the stock market and home prices. Hey, how about auto coverage? Biden Mutual Protecting your home, car, everything!


Why FDR Limited FDIC Coverage

The objective was to protect depositors, not rich people and big companies.

By Aaron Klein, WSJ

April 9, 2023 3:14 pm ET



The Biden administration responded to the failures of Silicon Valley and Signature banks by setting aside the limit on federal deposit insurance—a basic principle of New Deal bank regulation. In Congress, bipartisan support is growing for unlimited deposit insurance. This should worry everyone, but especially progressives. Federal deposit insurance was aimed at protecting the savings of the poor and middle class while leaving the rich to manage the risks of their large deposits. Extending it to large corporations and the wealthy would harm working people.


When President Franklin D. Roosevelt signed the Banking Act of 1933, it capped coverage at $2,500. The current cap of $250,000 covers about 98% of Americans.


Unlimited deposit insurance means that when banks fail, the government pays more. More than 90% of the cost of Silicon Valley Bank’s failure went to bailing out the uninsured deposits of companies such as Roku and Roblox. SVB’s 10 largest customers had $13 billion in total deposits.


Proponents say that banks (and maybe only the big ones) will be paying for deposit insurance. Basic economics shows that banks pass costs on to customers, particularly poor ones. As Georgetown legal scholar Adam Levitan states, “the higher costs for increased insurance premiums are likely to flow to the least price-sensitive and most ‘sticky’ customers: less wealthy individuals.”


Tougher regulation along with unlimited deposit insurance won’t prevent bank failures. Banks can, should and will fail. Almost every year at least one bank fails for good reason. Banks take risks, compete with each other and innovate to extend credit more efficiently and effectively. A world in which banks never failed would be even worse than unlimited deposit insurance, as not enough risks would be taken and people would be underserved.


Supporters of unlimited deposit insurance say that small businesses need this protection. They argue that businesses can’t be expected to keep an eye on the health of their bank. But the current system of limited deposit insurance seemed to be working before regulators bailed out Silicon Valley Bank. Most small businesses are already fully covered. One study of 600,000 small businesses found their median bank balance was $12,100, less than 5% of today’s deposit cap.


The deposit-insurance limit didn’t cause this crisis. Silicon Valley Bank’s management caused their bank to fail. The Fed failed as the bank’s supervisor. The bank’s auditors and credit-rating agencies didn’t catch the problem. SVB’s creditors, including the businesses that banked with them, ignored warning signs such as a Journal story five months ago flagging SVB’s problems.


There will always be some banks that fail. Government’s job is to protect the vulnerable, and existing deposit-insurance limits do that. When banks fail, losses should go to those who had their money at risk. Capitalism doesn’t work if the wealthy can never lose their money.


Mr. Klein is a senior fellow in economic studies at the Brookings Institution.

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