Uninsured Depositors Remain a Ticking Time Bomb for the U.S. Banking System.

Lawrence White

By Lawrence White

The failures of three sizable banks in March and April exposed major weaknesses in bank regulation. Who did what to whom, and when–a favorite Washington game–is currently playing out. What has received less attention is the major role that uninsured depositors played in these bank failures–and how uninsured deposits remain a major source of instability for the U.S. banking system.

Deposit insurance in U.S. banks is provided by the Federal Deposit Insurance Corporation (FDIC); for credit unions, it’s the National Credit Union Administration. The maximum amount covered is $250,000 in a bank account (although there are ways to have multiple covered accounts). For most households, that is more than enough.

Nevertheless, uninsured deposits are currently around 40% of all deposits (up from only 20% three decades ago), and these uninsured deposits are a lurking problem for banking stability–especially in an era of online banking. Uninsured depositors are almost always slow to recognize the financial problems of their banks. But when they do, their reactions are fast and massive. And their withdrawals may well inspire large withdrawals at other banks, with highly disruptive consequences for the U.S. economy: contagion risks are real.

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Lawrence White is the Robert Kavesh Professorship in Economics and the ​Deputy Chair, Economics.