BySteve Forbes,
Forbes Staff.
The bipartisan proposal to increase Federal Deposit Insurance Corporation coverage from $250,000 to $10 million for non-interest-bearing business accounts has been marketed as the "Main Street Depositor Protection Act." Despite its populist branding, this legislation represents a misguided policy that would expose taxpayers to enormous risk, eliminate crucial market discipline and primarily benefit wealthy corporations rather than ordinary Americans.
The fundamental problem with this proposal is the massive moral hazard it creates. If deposit insurance increases to $10 million, banks can take increasingly risky investment strategies, knowing the government will bail out their depositors if things go wrong. Large depositors, no longer concerned about their bank's financial health, will stop monitoring institutional stability. This removes a critical check on reckless behavior. If sophisticated business clients with millions at stake no longer scrutinize their bank's balance sheet, who will? The result is predictable: Banks profit when risky bets succeed, but taxpayers foot the bill when they fail.
The financial costs could be substantial. The banking industry would face significantly higher FDIC premiums to maintain adequate reserves for the expanded coverage—a 40-fold increase in the insurance cap for certain accounts. These costs would not be absorbed by banks. They would be passed directly to consumers, through higher fees and initially reduced lending and less favorable loan terms.
