Should uninsured deposits get a warning label from banks?

How do we avoid the next run on a bank?

If there has been a lesson in the recent spate of bank failures, it is that deposit flight can now happen quickly. It no longer requires a teller to hand money to customers waiting in long lines around the block. Tens of billions of dollars can vanish in hours or minutes.

That’s why guaranteeing deposits has become so crucial. The Federal Deposit Insurance Corp. explicitly insures the first $250,000 in any account, but nothing over that. The Biden administration has so far implicitly guaranteed all deposits by invoking a “systemic risk exception” — but such an implicit guarantee has not been genuinely tested against a run on multiple banks at the same time.

There are fair arguments for the FDIC to guarantee all deposits, but there may be a more strategic, surgical, and freemarket solution.

Consider this: What if the banking system coalesced around a separate insurance program — we’ll call it FDIC+ — for deposits above $250,000?

Banks could decide whether to use the insurance program. If they did, they could market and advertise that all deposits were insured. If they decided not to, the Federal Reserve could require them to have higher capital requirements and other restrictions to mitigate the possibility of a run.

The Consumer Financial Protection Bureau could then require banks to use the equivalent of the warning label on cigarettes to show which accounts were not insured. This warning would appear on customer apps and statements, making it clear to customers when their money was not insured and they would not be rescued.

Such restrictions would be a strong incentive for banks to participate in the FDIC+ program. Because banks would pay to insure their large deposits, the program would also provide an incentive for better business models.

Silicon Valley Bank, which failed in March, catered to the wealthy. The same is true of First Republic Bank, whose stock price dropped more than 43 percent on Friday as its fate remained uncertain. Bloomberg reported Saturday that the FDIC has asked JPMorgan Chase & Co. and PNC to submit final bids for the ailing lender this weekend in an effort to broker an orderly sale.

Silicon Valley Bank offered tech executives good deals on mortgages and more. Many of these executives, in turn, encouraged the companies they invested in to park their money in the banks. First Republic had a similar business tactic: It distinguished itself by offering wealthy clients jumbo mortgages, and offering spectacular white-glove customer service.

That meant the banks had a huge number of deposits larger than $250,000, which are not backed by the government’s deposit insurance fund. Nearly 90 percent of SVB’s roughly $88 billion was uninsured. And about two-thirds of First Republic’s deposits were uninsured at the end of last year.

That left the banks vulnerable to flights. Not only did they have large amounts of uninsured deposits, which businesses also commonly hold in their accounts, they also had a high number of clients with strong networks who were able to sense trouble and flee more quickly than a business may have. The bank run at SVB “appears to have been fueled by social media and SVB’s concentrated network of venture capital investors and technology firms,” concluded a report released by the Federal Reserve.

Maybe FDIC+ would have prevented it.