The FDIC Guarantees Instability

Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp. have worked feverishly since March’s run on Silicon Valley Bank to shore up confidence in the regional banking system. Treasury Secretary Janet Yellen and Fed Chairman Jerome Powell implied that the FDIC would cover all depositors. Rather than stabilize the system, their ad hoc approach has stirred panic.

The problem is that officials’ implied “systemwide” guarantee of uninsured depositors isn’t really systemwide. During the 2008 financial crisis, policy makers created the Transaction Account Guarantee Program, which offered an unlimited guarantee on non-interest-bearing deposit accounts. But the Dodd-Frank Act of 2010 required an act of Congress to backstop uninsured deposits. Otherwise, the FDIC can offer coverage only when a bank has already failed and gone into FDIC receivership—as Signature Bank and SVB did.