The perennial challenge in the realm of banking regulation is to strike the proper balance between two worthy goals. Those of us on the left and center-left want to make financing more readily available to working-class applicants looking to earn their way up the socio-economic ladder. To that end, we want to give banks and other lending institutions greater security in knowing that they can responsibly take risks on those who might not otherwise qualify for a loan. At the same time, we don’t want to undermine those same potential working-class borrowers by steering lenders into the ditch known to insiders as a “moral hazard”—that is, by inducing lenders to make bad loans. Washington’s job is to help financial firms strike the right balance.
A new Senate bill claiming to help middle-class depositors appears like a boon to those struggling to achieve the American Dream. But it’s actually poised to be a scourge. The Main Street Depositor Protection Act — a proposal from Senators Bill Hagerty and Angela Alsobrooks—would jack up the FDIC insurance limit from $250,000 to $10 million for certain bank accounts, purportedly to encourage small banks to make more loans to small businesses. In reality, by relieving banks of having to scrutinize more of their lending—in other words, by giving lenders the reassurance that their losses will be covered by the FDIC—the bill would induce banks to extend funds to borrowers who won’t be able to repay. And who will be forced to cover the loss? The ordinary working- and middle-class taxpayers who will accrue less interest on deposits and pay steeper interest on loans to cover these banks’ bad bets.
There’s a reason deposit insurance has always been capped. The program was created by Franklin Roosevelt during the New Deal to protect ordinary savers from the sorts of bank runs that had induced many people to hide their savings in mattresses, for example. But the idea wasn’t to remove all risk from banking. And that, then, points back to the scourge of the so-called moral hazard—that is, the problem born of people or institutions taking irresponsible risks because they’re shielded from the consequences. And history shows where moral hazards lead: The savings and loan collapse, the 2008 crash, and the Silicon Valley Bank failure in 2023 were all driven by concerns that lenders weren’t being guided by properly considered principles.
No doubt, the bill’s superficial appeal is clear—slap “middle class” on the title of a banking bill, and most people might be led to believe it will serve their interests. But fewer than one percent of bank accounts in America exceed the current FDIC limit. The owners of those much heftier accounts aren’t local bakers, dry cleaners, or shop owners. They’re corporations and investment funds with millions parked in the bank. Yet this bill would make taxpayers responsible for guaranteeing up to $10 million per account — all while pretending it’s about protecting Main Street.
And who covers the costs when various bad loans go sour? Supporters argue taxpayers won’t pay for it because the banks themselves fund the FDIC. But that’s laughable. When the FDIC raises coverage limits, banks have to pay higher premiums — and banks will pass those costs along through higher account fees, lower interest on deposits, and tighter credit. Think of that—working families will end up footing the bill for a level of insurance that only millionaires and big corporations benefit from. According to the Taxpayers Protection Alliance, expanding deposit insurance could cost consumers more than $30 billion. Even if banks absorbed some of that, it would still mean less lending and higher borrowing costs for the small businesses this bill claims to help.
Conservatives who believe in free markets typically oppose government picking winners and losers—and that’s fair enough. But Democrats, who once prided themselves on standing up for the working and middle classes, should similarly be appalled by a proposal that puts ordinary families on the hook for the next bailout. There’s nothing progressive about guaranteeing multimillion-dollar accounts while ordinary Americans pay more for basic banking services. Raising the insurance limit to $10 million doesn’t make the system fairer or safer — it just makes it more expensive and more fragile. And no one who believes in simple economic fairness should support a hidden tax on working people that subsidizes the well-off.
