Treasury Secretary Scott Bessent and Progressive-Democrat Senator Elizabeth Warren (D, MA) want to raise the FIDC’s deposit insurance cap from its current level of $250,000 to $10,000,000. They want to do this, too, regardless of the size of the financial institution and the nature of the institution, whether it’s a small deposit and lending enterprise or a large institution that specializes in large and larger investing. This is a very large overreaction over a couple of mid-sized banks going bankrupt from those banks’ management incompetence, not least of which was their decisions to not match their interest rate assets—loans outstanding, including to the government in holding its debt instruments—to their deposit interest rates, which were the banks’ debits. Nor did they match the duration of their loan assets to the duration of those deposit debits.

The runs on the banks, which began over otherwise ordinary credit concerns in the financial markets as a whole, turned into losses the banks should have been able to handle, but for those rate and duration mismatches. Neither the setup—those mismatches—nor the runs have anything to do with deposit insurance.

When any enterprise is held to be too big to fail, as a (fortunately very few) very large enterprises are held to be by the Federal government—the  systemically important financial institutions government considers some banks to be—then those enterprises, secure in the notion that government will bail them out if they run into trouble, become prone to take increasingly large risks and go well past risks that would otherwise by prudent business decisions to take.

That’s a very large moral hazard: not only are those enterprises taking those risks with other people’s money—bank depositors, for instance—they’re putting into risk the money of people far removed from that enterprise: us nationwide taxpayer money that the government will use to prop up those institutions that have gotten themselves [sic] into trouble.

Which brings me to this foolishness of raising the deposit insurance cap on banks. That’s only going to encourage banks, especially the smaller ones, to take risks that are too large for it to handle and would not take were they not so vastly backstopped by Uncle Sugar. That puts into risk play all the smaller depositors who are the ones frequenting these smaller banks. It also puts into play the money of all of us nationwide taxpayers, which money will be used to prop up the failing bank.

This is an insurance policy that should not be raised in its payout. In essence, all this insurance cap increase does is lower the threshold for Too Big to Fail (itself of no true value) down into the middle- and smaller-sized financial institutions.

Let the institutions stand or fall on their competence in a competitive environment. That competition will weed out the lousy managers, and the people will be made whole enough with the current $250k insurance payout. The large enterprises that invest in, deposit into, borrow from the larger financial institutions will exert their own pressures on top of the market’s intrinsic competitive pressures to…encourage…management competence.