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

The real FDIC debate is not about limits. It’s about management quality, market discipline, and which banks actually survive the next cycle.

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

First, a level-setting comment: everyone talks their book. We all carry biases that align with our incentives. That’s human behavior. Even Gandhi, advocating non-violent resistance, was talking about his people’s future. Talking about your book isn’t immoral. It’s simply a reminder to acknowledge your incentives before debating the incentives of others.

So let’s take an honest, balanced look at the FDIC debate.

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Small Banks Say It’s Unfair

Many of the loudest objections come from small banks. Of the 4,421 banks in the U.S., 3,377 have under $1 billion in assets, about 76% of the sector. They operate traditional business models: taking deposits, lending locally, keeping communities alive, and powering the entrepreneurial small-business economy.

A jump from $250K to $20M would massively expand insured balances. That means higher FDIC assessments. And higher assessments hit the smallest banks hardest.

A recent Reuters report highlighted how regulatory policy changes already reshaped capital requirements across U.S. banks, affecting how regional and small banks manage balance-sheet risk.
Small banks understandably push back, not because the idea is morally wrong, but because the economics shift against them.

Big Banks Barely Notice

Call anything above $10 billion a “big bank” and anything above $250 billion “systemic.” There are only ~280 regionals and ~70 megabanks.

Big banks care far less about this FDIC debate because they already enjoy an implicit guarantee due to their systemic size and regulatory oversight. Post-GFC, depositors have treated the largest institutions as de facto insured, handing them massive low-cost funding advantages.

Whether fair or unfair, this is the reality of modern banking.

IntraFi: The Quiet Opponent

Then there’s IntraFi, the company that fractionalizes large deposits across its network so customers stay under the $250K insurance limit. They earn roughly half a billion in EBITDA annually at ~70% margins.

If there is one group absolutely opposed to raising the FDIC limit, it’s them. Their lobbying spending increased after the SIVB collapse, which tells you everything about their incentives.

The FDIC Can’t Magically Create Safety

The FDIC Deposit Insurance Fund holds ~$145.3 billion today, equal to about 1.36% of insured deposits. It is not sitting on trillions to guarantee expanded coverage. Raising limits means raising assessments. Someone pays. And usually, that someone is in the small-bank tier.

The Fed acknowledged some of this after SIVB’s failure, excluding banks below $5 billion from the special assessment.

But still, expanding coverage is not free.

The Moral Hazard Problem

If corporate treasurers know their $20M operating accounts are fully insured, their incentive to monitor bank risk drops to zero. That’s moral hazard 101.

This already happened in 1980 when the FDIC raised limits from $40K to $100K leading to risk-taking that helped trigger the Savings & Loan Crisis.

The issue isn’t deposits. It’s what bad management teams do with deposits.

A Targeted Increase Makes More Sense

Tens of thousands of U.S. businesses routinely maintain operating cash well above $250K to run payroll and pay vendors. These balances are transactional, not speculative.

The Federal Reserve’s small-business data confirms that many employer firms maintain liquidity needs above half a million dollars.

A targeted increase only for non-interest-bearing operating accounts could protect business continuity without turning every deposit into a risk-free asset.

If depositors at Silicon Valley Bank had been fully insured for essential operating cash, the $42 billion run in March 2023 would have likely been smaller.

The Real Predictor of Survival: Management

I recently spoke with an 82-year-old lifelong banker who researched which small businesses survived the late-80s/early-90s recession. The SBA expected financial ratios to predict survival.

They didn’t.

Capital ratios, liquidity, and asset mix do not predict failure.

The pattern was human.

Survivors had better management. Better judgment. Better discipline.

I wrote extensively about how ROTCE, TBV compounding, and management quality determine winners and losers in my full U.S. bank playbook:
This is the heart of the FDIC debate: policy tweaks don’t save poorly run institutions.

Consolidation Isn’t Stopping

Small banks can fight FDIC expansions, but they cannot reverse 30 years of consolidation. The real driver is shareholder math:

When returns don’t beat opportunity cost, shareholders eventually sell.

This affects private banks, community banks, regionals, and everyone.

Bloomberg recently reported that increasingly rigorous regulatory oversight continues to slow bank mergers. This only accelerates consolidation toward stronger operators.

If anything, consolidation continues independently of FDIC policy.

Why Activism Fails at Small Banks

This is where things get messy.

Ownership at small banks is fragmented among family trusts, retirees, and local community shareholders.

They don’t sell quickly. They don’t care about activist pressure. They collect dividends and treat the stock like a family heirloom.

The Wall Street Journal highlighted exactly this structural challenge for small institutions, governance quirks, and shareholder inertia make activist campaigns brutally hard:

These constraints keep valuations permanently cheap, and activists can’t fix structural illiquidity.

If you want to see which banks consistently earn above the cost of equity and which don’t, my TBVPS screen breaks down the entire universe:

Profitability Is Destiny

Increasing FDIC insurance won’t save poorly run banks.

Shrinking, merging, and selling will.

The real dividing line in this debate isn’t big vs. small. It’s profitable vs. unprofitable.

Depositors, shareholders, and regulators will always gravitate toward disciplined operators who earn attractive returns and compound book value.

Management, not FDIC limits, determines survival.

The best is ahead,

Victaurs