Op-Ed: Johnson opposes federal plan to expand deposit insurance coverage
In addition to my role as State Senator for North Carolina’s 35th district in the State General Assembly, I am also a small business owner, helping run my family-owned business, Johnson Insurance Management. As both a State Senator and small business owner, I want to speak out in opposition to proposed federal legislation that claims to be in the interest of small business owners like me and many others across North Carolina but, in reality, only benefits big businesses.
Senators Hagerty (R-TN) and Alsobrooks’s (D-MD) Main Street Depositor Protection Act would increase Federal Deposit Insurance Corporation (FDIC) deposit insurance coverage by nearly 4,000 percent, from $250,000 to $10 million for non-interest bearing transaction accounts. This unprecedented increase is not only a step in the wrong direction as the Trump Administration and Republicans in Congress look to deregulate America but also a threat to the stability of the banking sector and an ill-advised attempt by the government to create a system of winners and losers.
Unfortunately for North Carolinians, the winners aren’t Main Street depositors. It’s large business depositors.
While the losers are taxpayers, small businesses, and consumers. All of whom are on the hook for increased costs associated with this spike in coverage, but also for bailing out these large businesses when their banks fail.
The proposed expansion incentivizes reckless risk-taking by banks and erodes crucial market discipline. For our banking system to work, banks must earn the trust of their depositors, demonstrating that they manage funds responsibly even in times of financial uncertainty.
Large depositors play a vital role in this system. These are not the Main Street depositors the bill’s sponsors claim to be protecting. The median small business only holds an average of $12,100 in their account.
Rather, these large depositors are major businesses, with accounts that all exceed the current $250,000 FDIC limit. And these depositors have the sophistication to monitor their banks to ensure their funds are well-managed and taken care of. Essentially, banks are motivated to manage their funds responsibly, knowing that they’re being watched.
The proposed bill takes a sledgehammer to this balance. With a taxpayer-funded, government-backed $10 million guarantee, these sophisticated depositors will stop monitoring their banks’ practices, while banks will place high-risk, high-reward bets, hoping to reap massive profits.
And when banks’ risky investments fail—and they always do—taxpayers will be on the hook to bail out banks that invested recklessly and pay out big businesses, which should have been monitoring their banks.
But the costs to consumers, small businesses, and taxpayers don’t just come after a bank has failed. As anyone in the insurance industry will tell you, higher coverage means higher premiums.
When banks face higher premiums, they will inevitably pass these costs onto consumers. That means higher bank fees, higher rates of lending, and lower rates on deposits. For small businesses like mine, we don’t have $10 million sitting in our bank accounts.
More than 99 percent of deposit accounts are already fully protected by the existing limit. But under this bill, we’ll see our banking fees rise just to subsidize increased deposit insurance for the less than one percent of large depositors that shouldn’t be in a position to need a bail out in the first place.
In 1980, the federal government increased deposit insurance coverage from $40,000 to $100,000. The resulting Savings and Loan Crisis saw more than 700 banks close and left taxpayers to clean up the mess to the tune of more than $120 billion.
Our leaders in Washington, including those on the Senate Banking Committee like Senator Thom Tillis, need to make sure we’re not repeating past mistakes. Protecting Main Street is a worthy goal, but the Main Street Depositor Protection Act is not the way to do it.
Todd Johnson serves in the North Carolina State Senate for the 35th District representing Union and Cabarrus Counties
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