This is what we need to do for the present: "A greater stabilizing source would be to insure all deposits in transaction accounts, without limits."
[T]he biggest impact would be on small-business customers, which often must have more than $100,000 in cash to meet payroll requirements and other needs. If the insurance coverage is increased to $250,000, about 68 percent of all small-business deposits will be insured, according to Oliver Wyman data. Today, about 51 percent of small-business deposits are protected.
Indeed, the move will likely strengthen the competitive position of smaller banks, which are being elbowed out by giants like Bank of America, Citigroup, and JPMorgan Chase. Small-business customers have flocked to those institutions, thinking their money is safer because they are “too big to fail.” Some consider keeping deposits in community banks more risky: Despite their local touch, they may be too small for the government to save.
Others, however, question how much the measure will really help. One reason is that customers most likely to pull their money tend to be midsize corporations that keep more than $250,000 in cash in an account.
“A greater stabilizing source would be to insure all deposits in transaction accounts, without limits,” said Michael Poulos, an Oliver Wyman consultant. That would cover about 81 percent of small-business deposits, “but that would look like a giveaway to businesses, rather than helping mom-and-pop with a big C.D.”
William M. Isaac, who was the chairman of the F.D.I.C. between 1981 and 1985, said that lifting the limit to $250,000 is “all show, no substance.” “It doesn’t do what needs to be done,” he said. “It might make somebody’s grandmother feel good, but that is not the problem that we have in the financial world: banks won’t lend to other banks.”
For more than a decade, the banking industry pressed the government to increase its insurance coverage. Congress last raised the limit on insured deposits in 1980, to $100,000 from $40,000. But despite years of rising prices, lawmakers resisted increasing the cap.
The concern was that raising the limit would increase the moral hazard, giving banks and customers incentives to take more risk than they otherwise would take. But with the banking industry under siege, that view appears to have changed.