Walk into any bank branch in America, and you will likely see a sign that says, in big letters, 'FDIC' and 'each depositor insured to at least $250,000.' The 'at least' part is taking on new meaning as a banking crisis unfurls.
to guarantee all depositors in Silicon Valley Bank and Signature Bank. Officials have been not-so-subtly suggesting they won't allow large depositors in any banks to lose cash.that "similar actions" could be warranted if smaller banks face runs — opening the possibility of even community banks receiving implicit backing.
The goal of Yellen and other officials is to prevent financial contagion, where depositors withdraw cash from small and mid-sized banks and spark a freeze-up of credit across the economy.The cap on deposit insurance is a long-standing feature of U.S. banking regulation. To abandon it, especially without explicit Congressional authorization, opens up a world of issues.
It could create a "moral hazard" issue in which banks can take extreme risks without the discipline created by large depositors being wary of loss. It raises questions about how the fees banks pay for FDIC insurance ought to evolve given that they have been set historically assuming larger deposits are not covered.If you have large deposits at a U.S. bank, you are probably safe, and that in turn lowers the risk of a major crisis.
But the actions have opened a can of worms involving how the nation's banking system will work in the future.
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