The case for $25 million of FDIC deposit insurance

Former Treasury secretary Steven Mnuchin said this week that the FDIC insurance cap should be raised "to either $10 million or $25 million" in order to prevent regional banks from being at a disadvantage to the big money-center banks.

Why it matters: Businesses often need to keep a lot more than $250,000 on deposit in order to comfortably fund their day-to-day operations, including making payroll. Such businesses are in no position to be able to gauge the creditworthiness of banks.

Flashback: Former FDIC chair Sheila Bair took control of Wachovia, the fourth-largest bank in the U.S., in September 2008. Ultimately it was sold to Wells Fargo, who outbid Citigroup for the bank.

• The problem at Wachovia was a $5 billion bank run, led by large uninsured depositors. If those deposits had been insured, said Bair the following month, that “definitely would have made a difference.”
• To address that problem, Bair introduced the Transaction Account Guarantee Program in October 2008. The plan, which didn't require Congressional legislation, effectively insured all deposits in corporate transaction accounts; it expired at the end of 2012.

The big picture: The fast rise in long-term interest rates has made corporate depositors worried about all but the very largest banks — the ones officially deemed too big to fail.

• Per Bloomberg, Y Combinator president Garry Tan wrote in a message to peers: “Anytime you hear problems of solvency in any bank, and it can be deemed credible, you should take it seriously.”
• The catch: Just about any bank, even JPMorgan, can be the subject of solvency rumors in today's interest-rate environment.

What they're saying: "We’ve got a huge systemic crisis," former comptroller of the currency Gene Ludwig tells Axios.

• "If you’re a business bank, almost by definition you’re going to have a lot of uninsured deposits."

• "We have to do something about deposit insurance. The notion that deposit insurance creates moral hazard is one of the biggest canards in the world."
• "Some mid-size banks are in very tenuous situations," adds Klaros co-founder Michele Alt. "In recent weeks, depositors have moved an estimated $550 billion out of small banks and into big institutions and money market funds."

Between the lines: The Dodd-Frank banking reforms of 2010 made it more difficult for regulators like the FDIC to unilaterally guarantee deposits in the way they did in 2008.

• At the time, no one had ever seen a bank run nearly as fast or as dangerous as the one that hit Silicon Valley Bank.

The bottom line: Government guarantees are effective at preventing deposit runs. But in order for the existing $250,000 limit to be raised, Congress would have to pass new legislation.