With the federal funding situation resolved and the government open, Congress can finally return to legislative business and begin to address the real concerns of Americans who have grown more anxious about the state of the economy, inflation, energy costs, and a government-created health care crisis. Yet, rather than tackle those problems, a small cadre of senators are instead channeling their efforts to give a banking boost to the wealthiest among us. That is a serious misallocation of valuable time.
The issue at hand centers around deposit insurance, which protects the accounts of people in the unlikely event of a bank failure. Currently, the Federal Deposit Insurance Corporation and National Credit Union Administration protect up to $250,000 in assets, but a new bipartisan bill, the Main Street Depositor Protection Act, seeks to raise the limit to a staggering $10 million for all transaction accounts at banks and credit unions. That’s almost a 4,000% increase.
No justification or detail has been provided to show why a $10 million insurance cap is needed at this moment. In fact, 99% of all accounts already fall below the existing cap, so only a very narrow slice of deposits stand to benefit. The typical American has $8,000 in transaction accounts (savings, checking, and money market), according to 2022 Federal Reserve data—nowhere in the neighborhood of the existing limit.
Aside from the fact that raising the insurance limit isn’t immediately needed, the Main Street Depositor Protection Act also doesn’t apply evenly across the financial system. Language in the bill requires banks over a certain asset size to pay a larger amount into the insurance fund to cover the cost of expanded insurance. This would increase the fees paid by the top 130 banks from this expanded coverage while still expecting them to help fund the deposit insurance system. It amounts to one group getting a government-backed guarantee, while others are left with the burden.
Then there is the question of cost. Over a ten-year period, higher premiums and other costs placed on a handful of banks could exceed $30 billion, according to an estimate from the Taxpayers Protection Alliance. Banks do not eat those costs; they pass them on to customers through higher fees, reduced services or tightened lending.
So what can be done? First, regulators must maintain proper oversight of all financial institutions. If the argument for greater protection is that bank failures happen, then part of the solution should be stronger oversight on the front end to ensure future failures are minimized. Simply increasing the deposit cap only adds more risk to the taxpayer without making the system safer or sounder.
Second, policymakers should address competitive distortions in the financial system. One issue is the tax-exempt status of many credit unions, which gives them a competitive advantage over community banks. It’s time to reconsider whether that exemption remains appropriate in its current form. Often, the largest competitor in small town America isn’t a mega-bank, but instead a credit union that has both tax and regulatory competitive advantages.
Third, tailor regulatory burdens to reflect size and risk. Community banks don’t have the compliance armies or data-analytics capabilities of megabanks. Too many one-size-fits-all rules hamper their ability to serve small businesses, families, and local farms. Reducing unnecessary regulatory weight frees up capital for lending and innovation instead of complex compliance. It’s regulations that have pushed thousands of banks out of business or forced them to merge with other institutions.
If Congress were to decide increasing deposit insurance levels is warranted, it should apply uniformly, not selectively. A modest, fact-based rise in the cap for all institutions, or perhaps indexed for inflation, would make far more sense than a massive boost for a narrow subset of institutions that would pay the cost for the entire sector. That kind of approach preserves fairness and avoids tilting the playing field.
The Main Street Depositor Protection Act may sound like a victory for small banks. In reality, it is a victory for some banks and a step backward for taxpayers, fairness, and market discipline. Congress should pause and do what it takes to strengthen our banking system—without picking winners and losers.
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