How to Make Banks Less Safe deposit insurance moral hazard
More deposit insurance means more moral hazard and taxpayer risk.
Bad ideas never die, but they do get worse. An example is the embrace by the Trump Administration and some Republicans of the Elizabeth Warren idea to expand federal bank deposit insurance.
The legislation would raise the Federal Deposit Insurance Corp. limit to $10 million from $250,000 except for global systemically important banks (G-SIBs) like JPMorgan Chase, Citigroup and Bank of America. Credit unions and midsize banks say they need a higher insurance limit to compete with the goliaths.
It’s true the 2010 Dodd-Frank Act entrenched the biggest banks as “too big to fail.”
But they are also required to comply with stricter regulation, including liquidity and capital standards and regular stress tests. Capital requirements for most midsized banks are about 7% versus upward of 10% for most giants.
Even if a higher insurance limit reduces the risk of bank runs, it won’t prevent deeply insolvent banks from failing. But the FDIC tab will be greater because more deposits will be insured. If the higher guarantee encourages more recklessness, financial losses across the banking system could be greater.
Wall Street Journal Editorial 19 October 2025
Fed stumbled badly in its attempt to update US capital rules and bring them into line with the international Basel standards, which led to a humiliating climbdown by American regulators last year.
My view is that the vast majority of banks’ capital requirements should be set under the main capital rules (the Basel Endgame), more like other countries.
https://englundmacro.blogspot.com/2025/06/how-to-avoid-bank-safetys-death.html
It’s notable that the FDIC decided to cover all uninsured depositors at SVB and Signature Bank in 2023
There are sensible debates to be had about the moral hazard of too much protection, leaving banks and their clients with too little responsibility for the risks that lenders take.
https://englundmacro.blogspot.com/2025/02/dont-mess-with-deposit-insurance.html
SVB Backstop Revives the Specter of Moral Hazard - Dodd-Frank Act
https://englundmacro.blogspot.com/2023/03/svb-backstop-revives-specter-of-moral.html
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