Should The FDIC Cover $20 Million Deposits? The Real Debate Isn't What You Think.

Small banks call it unfair. Big banks barely notice. IntraFi wants the status quo. But the real story is the human one: only great management, not policy tweaks, determines which institutions survive.

There’s a $20 million question being debated in banking circles, right now. One that has polarized everyone from big banks, to small banks, to bank operators, to bank investors. That debate is around increasing the FDIC insurance limit from $250,000 per deposit account to $20 million and potentially $10 million for non-interest bearing transaction accounts.

First of all, a level-setting comment: everyone talks their book. We are all consciously or subconsciously biased toward ideas that promote our best interests. And one of the beauties of being human is that those biases sometimes cause us to emotionally defend positions that we believe are right. We shouldn’t be ashamed of this though; we should instead acknowledge it to keep our words and actions productive. Afterall, even Gandhi, in preaching non-violent protest, was ‘talking his book’ for his and his people’s future as they tried to break from British rule. Talking your book can be productive, so in the spirit of non-violence, let me give you an unbiased view of the current debate on raising FDIC insurance limits from $250,000 to $20 million.

Of the major players right now, some of the loudest objections come from small banks and the debate centers on unfair financial impact and the creation of risk in the system. And to level set, most non-banking natives would be suprised to know that of the 4,421 banks in the U.S. right now, the vast majority, 3,377 have less than $1 billion in assets, comprising about 76% of all banks. There are 694 with assets between $1 billion and $10 billion, about 16%, which would be considered larger “community banks”. These banks all make make money the traditional way, taking your deposits and lending it out at a spread. They invest heavily in their local communities, they do great & noble work, and they keep the entrepeneurial Small Business economy thriving.

Big banks are also involved in the discussion, but to a lesser extent. I can call anything above $10 billion but below $250 billion in assets a big bank, and there are about 280 of these, around 6%, which most call “regional banks”. On top of this there are about 70 or 1.6% of total in banks with greater than $250 billion in assets. On one hand, I think the largest banks don’t care about this debate largely because the “too big to fail” banks hold around 40% of the deposits in the country already. But they do care in the sense that this increase in the limit would be an explicity costs where they currently have some level of an implicit guarantee by the government due to their size and systemic importance. Whether this is fair or unfair is beside the point. It is the reality. Big banks make a lot of money from this implicit guarantee because people are willing to deposit money with them for next to nothing that they then take and invest to deliver returns for their shareholders. So to put it in simple terms, post GFC, Jamie Dimon & Brian Moynahan kind of already have a “$20 million FDIC deposit guarantee”.

And lastly, IntraFi is also involved. IntraFi has built a profiable business built off great technology that solves the current challenge of wanting to take large deposits, but not being able to offer FDIC insurance. They step in and if a small bank has a local customer with more than $250,000 in their operating accounts, the bank for a small fee, can work with IntraFi to fractionalize this and scatter it across their network of 3,000 banks in sub $250,000 pieces. IntraFi makes about a half a billion in EBITDA annually (at 70% margins) from this business. If there were one party in this debate that categorically does not want the limit to legally be increased, it would be IntraFi. And this is validated by the fact that they upped their lobbying spend in 2023 after SIVB failed and the whole deposit guarantee limit debate started up.

The biggest picture on the issue should start with the FDIC and deposit insurance. Remember, the FDIC was created in 1933 to stop bank runs that were destroying the economy. Deposit guarantees back then were around $2,500 and weren’t lifted to $250,000 until 2010. The “guarantee” though operates like a loan loss reserve. Today the Deposit Insurance Fund (DIF) holds roughly $145.3 billion and the reserve ratio is about 1.36% of insured deposits. They literally do not have the cash in the bank to guarantee it if a lot of banks mismanaged themselves and went belly up. So when insured balances expand, the FDIC must raise assessments to protect that ratio and the fund relies on banks paying those quarterly premiums. Raising the insurance limit does not conjure new safety out of thin air, someone pays. The concern is that someone will be every bank including the 3,377 smallest ones. A significant expansion in insured deposits would require higher assessments and higher costs which would disportionately hit the smaller banks.

In the wake of 2023 and SIVB’s failure though, the regulators acknowledged this and excluded banks below $5 billion from the “special assessment” to replenish the DIF fund. For the rest it was calculated on their estimated uninsured deposits as of December of 2022.

There is also a moral hazard inherent in raising the FDIC limit to $20 million which is a major concern, as it severely undermines market discipline. If a large corporate depositor knows their multi-million-dollar operating cash is fully insured, their incentive to monitor the bank’s risk exposure drops to zero, effectively transferring the entire burden of oversight to regulators, who are historically reactive. This lack of risk sensitivity allows banks to attract cheap, stable funding and do risky things to earn money and deliver returns to shareholders. In 1980 this happened across the industry when the deposit insurance limit was increased from $40,000 to $100,000 to help banks stave off the risk of disintermediation risk posed by new innovations like high-yielding money markets. The problem was that some banks took the deposits and did stupid things with them, leading to the Savings and Loan Crisis and waves of failures. It’s always the stupid things that management teams do with deposits, not the deposits themselves. Remember that.

The argument for a targeted expansion of the FDIC cap is strongly grounded in commercial reality. Tens of thousands of American businesses routinely maintain non-interest-bearing operating cash balances well above the $250,000 limit simply to run payroll, pay vendors, and manage inventory. And this liquidity is transactional, not speculative. The Federal Reserve’s Small Business Credit Survey and SBA lending data confirm that a meaningful share of established employer firms operate with financial needs and cash buffers exceeding $500,000. Raising the cap specifically for these operating accounts would protect the liquidity heartbeat of small business without creating the moral hazard of turning every savings account into a federally insured investment product to be gambled with by risk seeking banks. Perhaps the powers that be can fine tune the guarantee to focus on non-interest bearing operating type accounts as a first and more intelligent pass. And if you want to “opt-out” of this, I’d say go for it. This is capitalism afterall and so if you think it’s better to not be able to serve these larger business accounts, then you should be able to choose so and find your own way.

The benefit is also that smaller banks could have a version of the “implicit guarantee” that big banks do. And the counterfactual is straightforward: if depositors at Silicon Valley Bank had been fully insured for their essential operating balances, the first, panic-driven wave of withdrawals in March 2023 would have been substantially less than the $42 billion that rushed out. But this again brings me back to the most important point.

I recently had the pleasure of spending time with an 82-year-old lifetime banker about his experiences in the late 80’s and early 90’s doing credit analysis on what small businesses & banks survived, and which failed. This gentlemen spent weeks with the head of the SBA at the time and they expected to find clean balance sheet or net income predictors of survival. Capital ratios. Earnings power. Asset mixes. Liquidity buffers. Interest-rate exposure. The results surprised them, some well-capitalized businesses with strong earnings failed. Some thinly-capitalized businesses with modest income survived. When they stripped everything back the common denominator among survivors was management aptitude. Plain old-fashioned human judgment. The ability to see risk early, stay disciplined when the cycle turns, and keep your company alive when the world changes.

This brings me to the bigger, more productive point that I hope all parties can agree on. The financial cost of increasing the FDIC limit will disproportionately fall not just on the smallest, but on the least profitable banks. This is the vital distinction: the burden is not purely about size; it’s about size combined with the inability to generate competitive returns. Small banks must understand that raising the limit or not can’t reverse the industry’s 30-year consolidation trend. And this is because the real reason the number of truly community, sub-$250 million asset banks has collapsed is not primarily regulation; it is shareholder math. There’s an addage in investment banking circles that banks are not bought, they’re sold. And regardless if you’re a public $10 billion or private $400 million bank, you have shareholders. And as a stock company, you are tasked with generating returns to shareholders and suppporting the mission you choose. Owners must decide if and when they can earn better returns elsewhere, and make the decision to sell. Often times this happens with smaller private banks when 2nd or 3rd generation shareholders accumulate stock as its passed down to them and are forced to ask why they own it. Market environments will shift, costs will change, and regulations will be unfair, but in the long run, profitability determines a bank’s ability to continue as a going concern for shareholders. And this profitability is driven by management’s actions, not words.

That is precisely why this FDIC debate, while critical, does not determine destiny. You can raise limits, fight limits, or carve selective exceptions, but none of it replaces strong leadership that generates great shareholder returns (for their local owners nonetheless). The banks that will survive and thrive are those that compound returns above their shareholders’ opportunity cost, serve customers well, and build franchises durable enough to outlive inevitable regulatory shifts. This is something I hope large, small, and bank investors alike can agree on and non-violently collaborate on. For the future of the U.S. banking ecosystem, because having studied banking systems globally I can tell you it is the best here without a doubt and I’d like to keep it that way.

Debates like this are fun because they embody the classic David vs. Goliath narrative, pitting “fair” against “unfair.” And I’m all for the part of operating in a free market where you speak up for your commercial interests, aka ‘talking your book’ or backing it up by spending your profits to lobby for it. But the more crucial part is ensuring your long-term survival because you believe you are the best one to fulfill the mission in your community. In the banking industry, that is achieved only through disciplined, profitable management that consistently generates real shareholder returns over time.

Ultimately, while we debate limits, fight for exceptions, and talk our books, the most powerful thing anyone in banking can do is return to the fundamentals: disciplined, profitable management that consistently generates real shareholder returns and builds a system worth saving. Let’s all focus on that for a while.

The best is ahead,

Victaurs