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Game theory on why the FDIC MUST raise their max to a million

If you have influence over a congressperson, ask them to empower the FDIC to raise the cap to a million. ($5 million or $10 million would be better, and see below how that works)

Why?

Because smaller banks won’t be able to keep ANY business accounts with a need for monthly working capital over 300K without that in place. Period. As a business owner or wealthy person, why take the risk?

The small banks will have runs on them, and fail, not because they are fiscally unsound, but because the cash outflow will happen faster than they can liquidate their assets many of which have declined in value, but will be OK if held to maturity (bond or mortgage) . Each failing bank will require the FDIC to save the depositors who didn’t run. Soon their reserves will be gone.

Here’s the fix!!

All banks pay FDIC insurance premiums to the FDIC but those premiums should be based on the size of the account. That way, larger “too big to fail” banks with billion dollar deposits pay a progressively higher rate for each million under the same EIN (not per account). That levels the playing field with the smaller banks.

The giant banks will never need the FDIC to pay out, and their premiums will be even higher than smaller banks per billion in assets. but it gives smaller banks the ability to keep deposits. They need depositors up to $5 million and even higher.

All banks should be able to pay extra for higher coverage as well. The giant banks would be tempted not to. But if the smaller banks advertise up to $100 million in FDIC coverage, AND they provide niche business-friendly services like SVB, Signature and First Republic, businesses will stay.

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