Full Bailout of Silicon Valley Bank and Signature Bank Depositors Leaves Uncertainty About FDIC Limits

The FDIC’s and Federal Reserve’s decision to cover fully deposits at both Silicon Valley Bank (SVB) Bank and Signature Bank leaves some uncertainty about whether banks’ deposits are fully insured above $250,000 per depositor per class of deposit. President Biden did not clarify the issue when he spoke this morning to allay depositors’ concerns, even though he explicitly promised that deposits are protected.

There is an issue of moral hazard here. FDIC insurance limits are well established. Should depositors who ignore these well-established limits, and keep deposits above those limits to curry favor with senior bank executives and get certain privileges – as was the case with SVB - get their own rules?

But, still more important than the moral hazard issue here at the moment, is what happens when and if there is another 5 or 10 or 100 bank failures. With SVB Bank and Signature Bank, the FDIC invoked the banks as “systemically important” in order to provide the unlimited depositor protection that it is providing.

Can depositors assume that every bank going forward is going to be systemically important and that they’ll be made whole? Is there a number of banks that is hit when the “systemically important” designation can no longer work or a size of a bank? And, then what is the rule for credit unions and the NCUA?

Since this can only be changed by an act of Congress, and until such act occurs, we continue to recommend that depositors stay within applicable FDIC and NCUA limits.

A great primer on FDIC insurance can be found here.

Compare CD rates here.

Check out the best savings rates here.