The collapse of Silicon Valley Bank and Signature Bank in early March is prompting questions about whether the level of federal insurance provided for bank deposits should be raised.

Currently, the Federal Deposit Insurance Corp. insures deposits of up to $250,000. Coverage limits are per depositor, per FDIC-insured institution and per ownership category. Federal regulators have said all deposits, both insured and uninsured, in the two failed banks will be returned to depositors.

Bloomberg has reported that a coalition of officials from midsized banks sent a letter to regulators asking for the FDIC to expand its insurance to cover all bank deposits for the next two years to help restore confidence in the banking system.

Nationally, discussion has increased about whether the cap should be permanently raised. When the FDIC was founded in 1933, the initial insurance cap was $2,500, according to Investopedia. By 1980, the deposit insurance cap was $100,000. The cap was permanently raised to $250,000 in 2010.

Over the weekend, four U.S. lawmakers said they are open to considering whether a higher federal insurance cap on bank deposits is needed, according to a report by Reuters.

The Business Record asked Iowa’s two U.S. senators, both Republicans, to share their thoughts on the FDIC insurance limit cap.

Sen. Chuck Grassley shared this statement:

“We need to take a close look at where the breakdowns occurred that led to the recent banking failures in order to properly diagnose the cause and determine what actions may be necessary to prevent a repeat. Silicon Valley Bank clearly mismanaged their capital, but regulators had the tools they needed and should have caught it. Thankfully, the banking industry appears to be taking the necessary steps to avoid similar failures. We also need to consider the positive and negative impacts of any changes to FDIC insurance. An increase to the FDIC insurance limit would come with new fees on banks, which would inevitably be passed onto customers. Most Americans have far less than $250,000 sitting in a bank account, but their fees would be raised even as they miss out on the benefits. Many banks also offer products that provide additional coverage for businesses and other customers with accounts in excess of the current FDIC coverage limit.” 

Sen. Joni Ernst shared this statement:

Congress is reviewing the collapse of the two banks and “Without access to the full set of facts … it would be premature to propose any specific and/or new regulations. Too often Washington leaps to conclusions before gathering all the facts, and the last thing we want to do is add burdens to taxpayers, small businesses or local banks across Iowa.”

The Business Record also reached out to other banking officials in Iowa. Below are answers, edited and condensed for clarity, to the two questions that we asked:

According to news reports, federal officials are studying whether to temporarily expand FDIC coverage to all deposits. Should all deposits be guaranteed, at least on a temporary basis? Why or why not?

Jeff Plagge, Iowa’s superintendent of banking:
“First and foremost, we continue to receive good reports from Iowa banks. Iowa banks are strong, and customers appear to be comfortable and confident with their banks. Without some real analysis, I don’t think there should be temporary 100% FDIC coverage on deposits. Doing so would just encourage the type of deposit concentration behavior that caused this problem. Most Iowa banks tend to have a low percentage of uninsured deposits (average around 17%) so Iowa banks have no resemblance to Silicon Valley Bank.”

John Sorensen, president and CEO of the Iowa Bankers Association:
“The recent bank closures do not reflect the health of the banking industry as a whole, which federal officials and top regulators have emphasized is strong, well-capitalized and highly liquid. I have confidence in the safety and resiliency of our banks. The two recent bank failures in California and New York involved institutions with an over-reliance on uninsured deposits, a failure to manage interest rate risk and industry concentrations. This is uncommon and usually results in regulatory correction well before it requires closure. There is more we need to learn about the actions of regulators leading up to and after these closures before considering changes in federal policy.”

Don Coffin, CEO and president of Bankers Trust:
“The recent bank closures do not reflect the health of the banking industry as a whole. Community banks, such as Bankers Trust, don’t take on the same levels of risk or exposure as banks that have been in the news. As such, I do not believe a blanket expansion of deposit insurance is needed at this time.”

Murray Williams, president and CEO of the Iowa Credit Union League:
“Recent bank failures have no connection to credit unions, but it is a situation the credit union community is watching very closely. It’s important to note that credit union deposits do not fall under the FDIC. Instead, all Iowa credit unions have federal insurance through the National Credit Union Administration, called the National Share Insurance Fund, where deposits are insured at the same level as FDIC-insured institutions – $250,000 per individual depositor.”

In 2010, Congress passed legislation permanently raising the limit of federal deposit insurance coverage to $250,000 from $100,000. Is it time to raise the limit again? If yes, to what level? If not, why not?

Plagge: “I do think the FDIC insurance coverage level needs a thorough debate and analysis of options. Any change would require Congressional approval. FDIC cannot make coverage changes on their own. When the deposit insurance was raised in 2010, the industry encouraged an annual inflation or CPI index to be included. If the coverage level is changed, an index should be added this time. Finally, I think there may be a discussion about adding a new tier of FDIC coverage, over and above the standard level, that banks or bank customers with a significant level of uninsured deposits can purchase. By doing this, the banks with a high percentage of uninsured deposits pay for the additional coverage rather than just assessing the entire industry for it.”

Sorensen: “The deposit insurance premiums that cover losses incurred in a bank failure are paid by our nation’s banks. And, the Treasury Secretary has made it clear any special assessments will be collected in a similar manner. The deposit insurance fund is 100% funded by the banking industry – not taxpayers. The FDIC deposit insurance fund had a balance of $128.2 billion as of Dec. 31, 2022.”

The association “believes deposit insurance premiums should be risk-based. So, those institutions posing the greatest risk to the fund garner greater regulatory scrutiny and higher premiums. Any discussion about increasing coverage beyond $250,000 per depositor should include this feature. Policymakers could also consider making expanded coverage optional with additional premiums paid by banks who elect coverage beyond a standard amount.

“It’s clear from this week’s Congressional hearings that the FDIC has the ability to limit the impact of a special deposit insurance assessment on community banks. We strongly urge the FDIC board to use this authority.”

Coffin: “This topic may be worth discussion, although there are broader implications that need to be considered beyond an increased cap, such as funding and administration. There are many ways bank customers can insure deposits above $250,000 today, and perhaps banks can do more to educate customers on the existing options. Regardless, it’s important to mention that any losses incurred in a bank failure are 100% paid by our nation’s banks – not by taxpayers.”

Williams: “As not-for-profit financial cooperatives, [the structure of credit unions] ensures we put the needs of our member-owners first. Nationally, 91% of credit union deposits are insured. In the SVB failure, only 5% of their deposits were federally insured – with 95% of deposits not federally insured. While there are a lot of ideas and suggestions coming from many corners, including within the financial services community and Congress, this is an evolving issue without a clear, set course of action at this time.”

Related coverage: Iowa’s banks are healthy, 2 state banking leaders say