Recent calls by big name investors on Wall Street to extend the Federal Deposit Insurance Corporation's (FDIC) coverage limit have been met with caution from former FDIC Chair, Jelena McWilliams. While the FDIC only currently backs deposits under $250,000, extending coverage to all bank deposits would not be cheap, with the cost being borne by either the bank or its customers. As more troubled lenders show signs of weakness, McWilliams warns that whatever Congress decides, there will be a cost associated with it.
The recent collapse of First Republic Bank has only served to renew fears of a banking crisis as regional lenders begin to lose their footing. Shares of PacWest and Western Alliance have also plunged since First Republic's failure, as investors lose confidence in the liquidity of regional lenders amid deposit flight.
Billionaire investor Bill Ackman has also warned that more lenders could soon fail if the FDIC didn't back all bank deposits. However, US Treasury Secretary Janet Yellen has said that the government isn't considering blanket insurance for all deposits.
McWilliams argues that simply changing the limit won't prevent what happened at some of these banks, referring to unique balance sheet problems that Silicon Valley Bank, First Republic, and other lenders dealt with as the value of their bond portfolios plummeted amid rising interest rates. While extending coverage may provide more confidence in depositors, McWilliams warns that there will always be deposits beyond any limit that may be set.
In conclusion, while calls for the FDIC to extend coverage to all bank deposits may provide a short-term solution to prevent bank failures, the cost of such an extension must be considered. Ultimately, Congress and policymakers must balance the need for greater deposit protection with the potential impact on the banks and their customers.
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