The Federal Reserve reported May 12 that the U.S. banking system had lost another $14 billion in deposits in the week ending May 3, and $30 billion in the two weeks to that date, so it is not just the $3-4 billion each lost by Pacific West and Western Alliance Banks. The loss in deposits since April 2022 is now almost exactly $1 trillion, and continuing, and will take down more banks.
A corresponding decline in commercial and industrial lending by U.S.-based banks began in January 2023; lending is down by $45 billion since then, or roughly 2% without considering inflation.
The Federal Deposit Insurance Corporation through its chair Martin Gruenwald proposed on May 10 to increase the deposit insurance level for business accounts; and on May 11 proposed a new fee assessment against 113 large and middle-sized banks to replenish the Federal Deposit Insurance Fund. Some members of Congress, such as Sen. Elizabeth Warren, have proposed instead raising the $250,000 limit of deposit insurance to some unspecified higher level for all depositors. Congressional sources say that this is the primary “solution” being put forward for the banking system crisis, including by banking organizations themselves.
But deposit insurance was, in 1933, the immediate reason the Glass-Steagall Act was passed! When deposit insurance first advanced in Congress in March 1933, President Franklin Roosevelt and Senate Banking Committee chair Carter Glass both opposed it, unless and until the universal banks were reorganized and split up, because it would otherwise give a federal government guarantee to banks using their deposit base to support securities dealing and speculation. The Insurance Fund became law only as part of the Glass-Steagall Act.
Making the insurance limit much higher—and effectively promising no limit, given what FDIC has already done in the cases of Silicon Valley and Signature Banks—would guarantee more, and riskier speculations by banks.
