The Federal Deposit Insurance Corp., which insures deposits to prevent runs on banks, doesn't get much attention outside of times like these.
But amid heightened fears about the health of banks, Congress and the FDIC are considering increasing the size of the accounts the agency can insure to $250,000, as proposed in the Senate's version of the bill — more than double the current amount.
Collectively as a nation, Americans have more than $7 trillion in their bank accounts, almost two-thirds of which is insured by the FDIC. Any money held in accounts at banks or credit unions totaling less than $100,000 is insured, while the remainder is not.
As a result, people with accounts larger than that, such as wealthy individuals and small businesses, are feeling vulnerable and shifting their money around.
"Uninsured depositors are starting to lose confidence that their accounts will be fully protected in the event the bank in which they have their money fails," said Geoffrey Miller, director of New York University's Center for the Study of Central Banks. "They've observed two major bank failures in the last few months, and that certainly causes one to think hard."
These depositors are transferring their money from smaller banks to larger ones under the assumption that the latter are more stable. In addition, some are simply withdrawing money from banks altogether, which is perilous for the banks because they rely on deposits to be able to fund loans, credit lines and other financial products that grease the wheels of the economy and enable banks to make money.
Still, historically it is rare for depositors to lose money, even if their accounts exceed the insured limit. During the recent failures of IndyMac and Washington Mutual, no depositors lost money because either the FDIC stepped in, or it facilitated a deal in which another bank took over the management of the affected accounts.
Miller said raising the limit is most important for the security it signals: "Namely, that the government and Congress are indicating to depositors, including business depositors, that they need not fear that the banking system is going to collapse."
But Miller also said that there are downsides to a higher sense of security, such as a decreased incentive to take risks.
"Since the problem we've gotten into is because of excessive risk by banks and other financial institutions, the policymakers need to be careful that they don't remove a valuable kind of market discipline that banks would otherwise face," he said.
Policymakers are unsure how to pay for an expanded insurance program. The FDIC's system works like other forms of insurance — the agency collects premiums from banks based on the institutions' risk. As with health insurance rates, the FDIC's premiums change if it has to settle claims or if it insures a larger pool of money. So by raising the caps, the FDIC will likely also have to increase its premiums.
But the question remains: By how much? Too much of a rate increase could further destabilize banks, while too little could risk the FDIC's insurance coffer being underfunded.
Ellen Seidman, financial services policy director for the New America Foundation think-tank, said the FDIC should not take on that risk without also passing on the cost.
"They've got to take into account the additional risk that they're taking on in setting the premiums," she said. "I've seen some talk of saying, 'Well, we're going to increase the deposit limit but we're not going to increase the premiums.' I don't think that makes any sense."
Trying to keep banks stable is an important goal, Seidman said. But maintaining the stability of the FDIC is essential.
Because the FDIC doesn't track the number of accounts that hold under $250,000, it is not yet clear how much more cash, in theory, would be insured.