FDIC
Deposit insurance as herd immunity: $250K guarantee breaks bank run contagion but creates moral hazard. SVB's 88% uninsured deposits forced systemic risk exception—$16.3B socialized cost.
Before FDIC existed, bank failures were contagious. Between 1930 and 1933, over 9,000 banks failed—not because they were all insolvent, but because depositors couldn't distinguish solvent banks from failing ones. The rational response was to run first and ask questions later. FDIC broke this deadly logic by making individual bank health irrelevant to depositor safety. The $250,000 guarantee transforms depositors from nervous creditors into passive stakeholders with no incentive to monitor or flee. This deliberate ignorance comes at a cost: banks can take risks knowing depositors won't punish them. The 2023 failures of Silicon Valley Bank ($209B assets) and Signature Bank revealed the system's current edge case. When 88-90% of deposits exceed the $250,000 limit, the insurance mechanism fails to prevent runs. The FDIC invoked its 'systemic risk exception'—used only twice before in its 90-year history—to guarantee all deposits, effectively extending unlimited coverage without changing the law. The $16.3B cost fell on all banks through special assessments, socializing losses from concentrated risk-taking. The debate now centers on whether the $250,000 limit should rise to $2.5M or even $10M, fundamentally reshaping who bears monitoring costs in the banking system.
FDIC's 'systemic risk exception' had been invoked only twice in 90 years (Continental Illinois 1984, WaMu 2008) before March 2023, when it was used twice in a single weekend for SVB and Signature Bank—revealing that the modern deposit base has outgrown the insurance architecture.
Key Facts
Power Dynamics
Insures deposits up to $250,000; resolves failed banks through liquidation, purchase-and-assumption, or bridge banks
The systemic risk exception gives FDIC and Treasury effective authority to guarantee unlimited deposits whenever they jointly declare systemic risk—an implicit expansion of coverage that Congress never voted on
- FDIC Board (3 of 5 votes required)
- Fed Board of Governors (must concur on systemic risk)
- Treasury Secretary (final approval)
- Congress (can override via joint resolution within 30 days, never exercised)
- OCC (charters national banks FDIC insures)
- Federal Reserve (systemic risk determinations)
- Treasury (backstop authority, special assessment approval)
- State banking regulators (close state-chartered banks that FDIC then resolves)
Revenue Structure
FDIC Revenue Sources
- Risk-based deposit insurance assessments from ~4,700 insured banks 95% →
- Investment income on Deposit Insurance Fund (~$128B) 4%
- Recoveries from failed bank assets 1%
Special assessments after large failures (2023: $16.3B across industry) create political pressure to avoid future invocations
Unlike central banks that can create money, FDIC must pre-fund or assess ex-post—finite resources constrain crisis response
Decision Dynamics at FDIC
SVB and Signature Bank (March 10-12, 2023): systemic risk exception declared in under 48 hours
Continental Illinois (1984): seven months of open-bank assistance before FDIC took control, establishing 'too big to fail' precedent
Finding buyers for failed bank assets; fire-sale prices increase losses to the insurance fund
Failure Modes of FDIC
- Continental Illinois 1984: First 'too big to fail' bailout, 100% depositor protection beyond insurance limits
- S&L Crisis 1980s: FSLIC (thrift equivalent) went insolvent; FDIC avoided same fate only because commercial banks performed better
- SVB/Signature 2023: Systemic risk exception exposed gap between $250K limit and modern deposit concentrations
- Deposit Insurance Fund target (2% of insured deposits) assumes correlated failures don't exceed ~$250B
- Uninsured deposit concentration creates coordination problem insurance was designed to solve
- Special assessments after failures create industry lobbying against future systemic risk declarations
Multiple regional bank failures with majority uninsured deposits could exhaust DIF and require Treasury backstop, triggering political crisis over implicit guarantees
Biological Parallel
Just as honeybees contribute to collective immune defenses that protect the hive even when individual bees sicken, banks pay premiums into a shared fund that protects the system even when individual banks fail. The 2023 crisis revealed the equivalent of an immune system facing a novel pathogen—deposit concentrations that the existing antibodies ($250K coverage) couldn't neutralize, requiring emergency intervention (systemic risk exception) that stressed the whole colony.