Banking on the wisdom of higher insurance limits on deposits

The maximum amount per account — $250,000 — that the Federal Deposit Insurance Corp. will guarantee is too small.

The swift failures this spring of Silicon Valley Bank, Signature Bank and First Republic Bank — the second-, third-, and fourthlargest U.S. banking failures ever — had multiple consequences. They made businesses and households nervous about systemic weaknesses in banks. And they prompted the FDIC to review its deposit insurance policy.

A primary option under consideration by the FDIC is to provide unlimited deposit insurance to everyone. Another option is to provide targeted unlimited deposit insurance for certain types of accounts, such as those of businesses that must maintain large balances to cover payroll and receivables in their ordinary course of business.

Incidentally, when I mentioned the FDIC deposit insurance limits a few months ago, responses from readers indicated that many people do not understand how this insurance works. This is private insurance, paid by banks, to protect depositors if the banks fail. The FDIC — a government entity — maintains a fund that backstops deposits. If the FDIC spends some of that fund following a bank failure, it increases its member banks’ future cost of FDIC insurance so it can replenish the fund.

Given that, either solution being considered seems better to me than the existing limits.

What does not seem reasonable is to expect businesses and households to research and monitor bank financial safety as their main means to avoid losses on deposits above $250,000 if a bank fails.

Texas banks

I recently set about figuring out bank safety in Texas. It’s not very easy, which I think is by design.

You can look up quarterly financial data on individual banks on the FDIC’s website, which enables users to generate a 75-page report on any bank with information on metrics such as assets, liabilities, income and losses

But if you are not a trained bank financial analyst, these reports will look like — well, I think the technical term is gobbledygook.

There is a simpler way. A for-pay service called Bauer Financial aggregates and analyzes this FDIC data, assigning a zero- to five-star rating for banks. In addition to relying on FDIC data, Bauer said it also takes into account trends and historical data, as well as regulatory actions taken against banks. Its June 2023 ranking, based on published results from March 31, lists 487 banks headquartered or doing business in Texas.

No banks in Texas received a zero- or one-star rating, indicating “troubled” status. Only five of those 487 Texas

banks received a two-star financial rating, which Bauer considers “problematic.”

The two-star banks are Unity National Bank of Houston, Spectra Bank of Fort Worth, First National Bank of Albany, Citizens State Bank of Ganado and American State Bank, based in Arp. All are small. Of these, American State Bank is the largest, with $1.16 billion in assets.

Twenty-three banks in the state received three stars, which Bauer considers “adequate” financially. The vast majority, 94 percent, of banks doing business in Texas received four- or five-star ratings, which is mostly comforting.

My bank, USAA, whose 2022 losses I wrote about recently, is one of those 23 threestar banks. That ranking is down a half-star in the previous quarter. USAA matters not only because it is my bank

but also because it is a large employer in San Antonio and the largest bank by customer deposits in Texas.

Other than USAA, you’ve likely never heard of the other three-star banks, as all are small. Only USAA is headquartered in a large Texas city.

Confusingly — perhaps amusingly — if you pay attention to the repetitive use of bank names, 47 of the 487 banks on the list start with “First National Bank.” Twenty-three start with “First State Bank,” 21 start with “Citizens,” and four start with “First Texas Bank.” Another 12 banks start with “American.” There are four “Lone Star,” five “Peoples” and six “Security” banks.

So if you look up your bank, make sure you search the right one.

When I start my bank, it will be called the First National People’s Lone Star American Citizens Security State

Bank of Texas.

To be clear here, nobody with less than $250,000 in deposits should care whether their checking, savings or certificate of deposit accounts are with two-, three-, four- or five-star banks. If you’re under that cap, every penny is FDICinsured. You should only care about a bank’s financial strength if you are above the insured limit, which few of us are.

Sadly for me, I don’t have any account balances above $250,000, so it doesn’t bother me that USAA gets three stars from Bauer for being financially “adequate.”

The confidence game

Another thing we can say is that it’s clearly not in the interest of regulators or the banking system to make bank finances easy to access and understand.

The FDIC publishes data

online so you and I technically can find it. And Bauer Financial is combining and analyzing this same data. But from a banking system health perspective, everybody is worse off if the general public pays very close attention to bank health. The banking system works best when it is slightly mysterious and bank finances are slightly opaque. Deposit banking is, in both traditional meanings of the phrase, a confidence game.

No bank is invulnerable to a total loss of confidence if it happens fast enough, because no bank carries sufficient deposits on hand to redeem all customers’ accounts simultaneously.

Regulators, of course, need to have good insight into bank finances. The vast majority of customers really do not and should not need to have the same insight.

More insight might make for flightier deposits, which destabilizes the system. If clever tech bigwigs hadn’t been paying so much attention and if they hadn’t been so highly networked, they probably wouldn’t have pulled their deposits so abruptly in the recent first quarter, and Silicon Valley Bank would be just fine today. SVB could have slowly earned its way out of a financial hole rather than implode from a bank run and be in FDIC receivership over the course of a weekend.

Blind customer trust in this sense is a banker’s and a regulator’s friend. Bigger FDIC insurance-deposit limits, either for everyone or targeted to business accounts, make sense to me because it increases this blind customer trust.

USAA Bank San Antonio-based USAA Bank is among 23 banks operating in Texas that recently received a three-star rating from Bauer Financial. For most consumers, that rating doesn’t matter.

Jacquelyn Martin/Associated Press Gregory Becker, left, former CEO of Silicon Valley Bank, testifies during a Senate hearing. SVB’s failure was not unavoidable.