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FDIC weighs changing the deposit insurance system after another bank failure


In the banking panic of 1907, J.P. Morgan came to the rescue. He and other financiers used their own money to prop up the U.S. banking system. Well, this weekend it was JPMorgan Chase. America's biggest bank bought most of the assets of First Republic Bank in a fire sale after First Republic was taken over by regulators. It is the third big bank to fail this spring. NPR's Scott Horsley is here. Hey, Scott.

SCOTT HORSLEY, BYLINE: Hi - good to be with you.

KELLY: Hi - good to be with you. It's so interesting to remember the history there. Talk us through how this latest takeover came about.

HORSLEY: Well, First Republic has been hanging by a thread really ever since the collapse of Silicon Valley Bank back in March. JPMorgan Chase and other big banks had tried to prop it up by depositing $30 billion at First Republic, but that was just a holding action. Last week we learned the bank lost a hundred billion dollars worth of deposits during the Silicon Valley contagion. And when that news got out, the company's stock fell to nearly nothing. Eventually, regulators stepped in and took over, and JPMorgan Chase agreed to buy what's left of First Republic's deposits and most of its loans. The 84 First Republic branches reopened this morning, and customers did have full access to their money. The failure, though, is expected to cost the government's deposit insurance system about $13 billion.

KELLY: Well, and when you start throwing around numbers like losses of $100 billion, this is serious. Is it time to call this a banking crisis?

HORSLEY: You know, there was a worry when Silicon Valley Bank went under that the problem would spread to other midsized banks, that nervous customers would take their money and flee to the safety of bigger banks. And we did see some of that, but the flight seems to have stabilized. Other regional banks are not reporting the kind of outsized exodus that First Republic experienced. Now, historically, there has been some political resistance to super-sized banks in the U.S. We still have far more small community banks than most countries do. Jamie Dimon, who's CEO at JPMorgan Chase, says those small banks do play an important role in the economy. But he argues big banks are important, too.

JAMIE DIMON: We have capabilities to help our clients who happen to be cities, schools, states, hospitals, governments. We bank countries. We bank the IMF. We bank the World Bank. You need large, successful banks. And anyone who thinks it would be good for the United States of America not to have that should call me directly.

HORSLEY: JPMorgan Chase was already by far the biggest bank in the U.S., and in fact, it had to get special permission from federal regulators to get even bigger with this acquisition.

KELLY: Scott, all three of the banks that have failed this spring - they all had a large share of uninsured deposits. How much did that contribute to their downfall?

HORSLEY: Ever since the Great Depression, the government's provided deposit insurance to reassure bank customers that even if a bank fails, they'll get their money back, and that helps to prevent bank runs. But deposits are only covered up to a quarter million dollars per account. And all three of these failed banks had a lot of deposits that were over that limit, money that bolted at the first sign of trouble. So that is very destabilizing. And as a result, policymakers are taking a look at the deposit insurance limit to see if some changes might be needed.

KELLY: What kind of changes might they be looking at?

HORSLEY: The FDIC came out with some policy options this afternoon. They said unlimited deposit insurance would be very expensive and might encourage undue risk taking. But some targeted increase in the limit might be beneficial, especially for business accounts used to cover payroll and that kind of thing. Aaron Klein, who's at the Brookings Institution, argues wealthy - only the wealthy would benefit from added insurance, though. And he worries that poor people would end up paying the cost of that, so he's against the idea. We should note any changes in the deposit insurance system would require an act of Congress.

KELLY: That is NPR's Scott Horsley. Thank you, Scott.

HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.