EXPANDING FDIC DEPOSIT INSURANCE DOES NOT HELP MAIN STREET

The following information was released by the Cato Institute:

Norbert Michel

The Independent Community Bankers of America, the trade association that markets itself as The Nation's Voice for Community Banks, is officially supporting the newest legislation to expand federal deposit insurance coverage. Before getting to the details of that new bill, it's worth considering exactly who the ICBA is speaking for.

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Many community bankers are opposing the new insurance expansion, and the ICBA doesn't exactly have a perfect record when it comes to supporting unpopular legislation.

Many outside of Washington may not know this story, but the ICBA helped get the 2010 Dodd-Frank bill enacted by making a deal with Rep. Barney Frank (D-MA).

The deal was simple. Cam Fine, at that time the president of the ICBA, agreed not to oppose the bill in return for two things. First, the new Consumer Financial Protection Bureau would only have supervision authority for banks with assets greater than $10 billion. In other words, the CFPB would be able to park federal employees (supervisors) in the nation's largest banks, but not in the ICBA's 5,000-plus member banks.

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The ICBA wants people to believe that the nation's small banks are the backbone of America. At the same time, though, they're telling everyone that it's critical to supply these banks with more federal backing.

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The problem, of course, is that small banks still have to comply with the CFPB's rules and regulations, and few have been happy with that outcome. I'm not sure how many small-town community bankers are still big Dodd-Frank fans, but at least they know who to thank for it.

Community Bankers Hooked on FDIC Deposit Insurance

The second part of the deal changed the formula used to calculate the fee banks pay to the Federal Deposit Insurance Corporation for deposit coverage. The new formula was a win for the ICBA's members because it increased the share of FDIC insurance fees paid by larger banks while decreasing the share paid by the ICBA's members. Dodd-Frank also permanently lifted the insurance cap to $250,000, making this part of the deal seem even better.

But while the deal surely saved "small" banks, collectively, billions per year in direct fees, those fees are only one part of the overall cost to expanding FDIC insurance. And the idea that "the big banks" pay all those costs glosses over reality. Heavily.

For starters, American taxpayers are ultimately on the hook for any losses the FDIC insurance program can't cover. That adds to the well-known moral hazard problem (the incentive for people to take more risk because they're federally insured) and lessens the incentive for large depositors to carefully monitor what banks are doing with their money.

The added direct cost on larger institutions can also filter down to smaller banks indirectly by increasing the overall cost of obtaining funds. And, of course, expanding FDIC insurance further justifies yet more federal regulation.

This last item is perhaps the downside that gets most frequently ignored. But FDIC insurance was basically the original sin in the banking sector when it comes to justifying federal regulation, and the regulatory burden has steadily increased for nearly a centurywith very little to show for it in terms of financial stability.

Either way, the newest approach to raising the FDIC insurance limits will only magnify each of these problems, and the cost will ultimately be borne by millions of Americans.

Hagerty-Alsobrooks Deposit Insurance Expansion

The newest bill to expand FDIC insurance coverage is cosponsored by Senators Bill Hagerty (R-TN) and Angela Alsobrooks (D-MD). Their effort also appears to have the support of Treasury Secretary Scott Bessent, who recently told a group of community bankers that he was "encouraged to see emerging bipartisan support for increasing FDIC insurance limits on noninterest-bearing transaction accounts."

The bill is called the Main Street Depositor Protection Act, but that title is populist politics at its finest. The bill would raise the FDIC coverage limit from $250,000 to $10 million, for all transaction accounts at banks and credit unions. And it would push most of the direct fees onto the largest banks, just like the Fine-Frank deal in 2010.

But the claim that this increase is meant to protect the typical American worker or small business owner is laughable.

Using the most current data publicly available (June 30, 2025), less than one percent of bank accounts have more than the current FDIC insurance limit ($250,000). At 54 percent, the share of the balances over the limit for those accounts is substantial, but that fact only further demonstrates who benefits from raising the limit. Hint: it's not Main Street depositors.

The typical Americaneven the typical wealthy Americansimply doesn't have anywhere near $250,000 in a bank account. And those who do can already avoid getting stuck with uninsured balances by spreading their accounts around, as well as by using reciprocal deposit networks and "sweep" accounts. So-called small businesses with payroll accounts have the same options.

Community Bankers' Washington Problem

The ICBA wants people to believe that the nation's small banks are the backbone of America. Similarly, Secretary Bessent claims that "Community banks are essential to America's heartland," and that those banks "provide the capital that binds small towns together."

At the same time, though, they're telling everyone that it's critical to supply these banks with more federal backing. If federal backing really is that important, then Americanot just it's banksis in big trouble.

Over the years I've been to countless policy forums where academics and government officials speak lovingly of the imposition of FDIC insurance in the 1930s. It's past the time to let it go.

Yes, federal backing helped quell a panic during the Great Depression. Yes, there have been fewer bank runs in the FDIC era. But federal policy prior to the Depression helped create the panic in the 1930s, and federal policy since then has been at least partly responsible for two major meltdowns. Yet, FDIC coverage (and broader federal backing) has not stopped panics even by insured customers.

Worse, FDIC insurance has all but destroyed the incentives for people to create private insurance solutions. The policy combination of increased federal backing and regulation has left markets less competitive, and less resilient, than they would be otherwise. The approach has created all kinds of narrow rent-seeking constituents within the financial sector, and it's left many Americans with the impression that the free enterprise system can't work in financial markets.

The bigger implication for the American system is much graver, though, because there's no objective economic reason to refrain from covering all financial losses. The failure of companies such as Walmart, Apple, and Amazon, for instance, would endanger millions of people's ability to earn a living. Do America's leaders believe in capitalism, or not?

The core issue is now much bigger than what the appropriate limit is for FDIC insurance caps.