Lawmakers could reduce the risk of bank runs by significantly raising deposit-insurance protection for accounts used for payroll and other business payments, the Federal Deposit Insurance Corp. said in a report Monday.
A targeted move to make sure businesses can get back money intended for such payments if a bank fails was the best of three options the FDIC considered for overhauling the deposit-insurance system, the agency said.
The report also discussed the possibility of establishing unlimited insurance for every bank account or generally maintaining the current framework of insuring only a set amount of deposits, but potentially raising the existing $250,000 cap, the FDIC said.
“Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects,” FDIC Chairman Martin Gruenberg said in a statement.
Monday’s report comes after federal regulators made the emergency decision in March to guarantee that all depositors at failed Silicon Valley Bank and Signature Bank could get their money back, regardless of how much was in their accounts.
Regulators have said they hoped the decision would prevent a broader run on banks. “Cascading bank runs could have caused widespread losses to business payroll accounts and more widespread financial contagion,” the FDIC said in its report on Monday.
Lawmakers in both parties have since discussed potentially raising the deposit-insurance limit from the current $250,000 per depositor. Treasury Secretary Janet Yellen has said such a change may eventually be worth considering.
Any change to the program would likely require congressional approval and could trigger higher assessments on banks that pay for the deposit insurance fund.
Proponents, including a trade group for midsize banks, have said expanding deposit insurance coverage would reassure bank customers and protect smaller banks from losing deposits to larger institutions.
The FDIC said a targeted expansion of federal insurance for business accounts would be analogous to a financial crisis-era program that temporarily provided unlimited federal guarantees to noninterest bearing deposit accounts.
Under a revised version of that program envisioned by the FDIC on Monday, instead of running in response to bank solvency concerns, depositors could move their deposits to an account with higher coverage within the same bank. That could have the effect of helping to make panic-driven runs out of a bank less likely, the FDIC said.