Increased deposit insurance for certain business bank accounts? What FDIC recommends

Companies with funds tied up in the recent bank collapses had to scramble to pay their employees on time. No one wants to go through that again.

That includes the Federal Deposit Insurance Corporation (FDIC).

Large concentrations of uninsured deposits make bank runs more likely, the FDIC noted in Options for Deposit Insurance Reform, a May 2023 report.

The solution may lie in greater or even unlimited deposit insurance, but only for certain types of accounts, the FDIC further explained.

Specifically, business payment accounts, such as those used for payroll, could benefit from a higher deposit insurance limit, without putting the system’s financial stability unnecessarily at risk. This could be achieved through a targeted coverage reform option – it’s one of three options presented in the report as explained below.

3 options for reform

Here are the FDIC’s three recommendations for reforming the deposit insurance system:

1. Unlimited coverage. This would provide unlimited deposit insurance coverage to all types of accounts. Fully insuring all deposits could effectively eliminate the threat of bank runs but may lead to excessive risk-taking on the part of some banks.
2. Limited coverage. With this option, the current $250,000 limit would be increased for all depositors and account types. While small- and medium-sized businesses holding deposits modestly above the current limit may benefit from a higher coverage amount, the largest deposit accounts would require a sharp increase in the limit (e.g., millions of dollars), putting the system further at risk.
3. Targeted coverage. Here, coverage would vary depending on the type of account. Business payment accounts would be given higher deposit insurance coverage with this option. Of course, businesses utilize various types of accounts, so differentiating among them could be a challenge. To distinguish a business payment account from other types of accounts, a tax identification number or employer identification number – as opposed to a Social Security number – could be used as a distinguishing identifier. Account features, such as being interest-bearing, could be another distinguishing factor, the FDIC report suggested.

In the meantime

Congress would need to take action before any of the recommendations included in the FDIC report could materialize.

So, in the short term, it’s as important as ever to keep a close watch on the financial health of the banks where your company has accounts.

Although things have been quiet since the bank failures earlier in 2023 – Silicon Valley Bank and Signature Bank in March and First Republic Bank in May – the FDIC isn’t resting on that, and Finance pros aren’t, either.