Fears over the stability of the banking system has led to an exodus of deposits from smaller regional banks to larger banks in recent weeks, as nervous customers moved their money to banks that are seen as “too big to fail.”
Some members of Congress have been looking for ways to boost the deposit cap, at least temporarily, in an effort to stop depositors from pulling their money out of smaller institutions that have been at the center of recent bank turmoil.
F.D.I.C. officials acknowledged on Monday that those bank runs caught them by surprise. As part of a review into what took place, the regulator has been studying ways to improve the system. Its report looked at the viability of raising the existing insurance cap; expanding it so that deposit insurance is unlimited; and creating a more targeted approach that would provide higher levels of deposit insurance to business accounts that are used for payroll processing.
The F.D.I.C. expressed concerns that broadly expanding deposit insurance could create “moral hazard” problems, that is, banks would be shielded from the consequences of making risky investments. It favored offering more protection to business payment accounts because that money is generally used for paying employees rather than investments.
“Increasing coverage to large deposit accounts with the most demand for liquidity would reduce or eliminate the need for depositors of such accounts to withdraw their funds out of fear for the safety of their deposits and for the continuity of their operations,” the F.D.I.C. said in its report. “This would have benefits for financial stability.”