A Ticking a Time Bomb Remains for the U.S. Banking System Uninsured Depositors

The banking system in the United States has been left shaking following the collapse of three sizable banks in March and April, throwing into sharp relief significant inadequacies in bank regulation. The focus seems to have shifted to political finger-pointing rather than addressing the critical role that uninsured depositors played in these failures. The frightening reality that uninsured deposits continue to threaten the stability of the U.S. banking system has been grossly under-discussed.

Deposit insurance in the U.S. is provided by the Federal Deposit Insurance Corporation (FDIC) for banks and by the National Credit Union Administration for credit unions. While the limit of insurance coverage is $250,000 per account, it’s alarming to note that about 40% of all deposits are currently uninsured, a significant leap from 20% three decades ago.

This large percentage of uninsured deposits is a ticking time bomb, posing a serious threat to the stability of the banking sector. This problem is especially prevalent in the era of online banking, where withdrawals can occur instantaneously. While these uninsured depositors are usually late in recognizing their banks’ financial issues, once they do, their reactions can be swift and massive. This abrupt withdrawal of large amounts can create a ripple effect leading to massive withdrawals at other banks, thereby disrupting the U.S. economy in its entirety. In other words, the risk of financial contagion is very real and terrifying.

The most straightforward and effective solution is to eradicate this instability source by extending deposit insurance to all deposits and depositors, regardless of the amount. However, it would require significant changes including Congressional action, an increase in deposit insurance premiums by the FDIC, and a risk-adjusted basis for levying premiums. At the very least, an inflation-adjusted increase to $350,000, in line with the 40% rise in the consumer price index since 2008, when the current $250,000 limit was established, seems imperative.