A deposit insurance revamp can curtail free riders

SoFi Technologies

12/11/2025 13:00

The author is a Reuters Breakingviews columnist. The opinions expressed are his own. Corrects the location of Rosedale Bank to Maryland in paragraph 4, not Texas as previously stated.

By Stephen Gandel

NEW YORK, Nov 11 (Reuters Breakingviews) - Warnings of moral hazard ring hollow when everyone already has their hand in the till. Big banks are rallying opposition to U.S. legislation that would beef up government guarantees on certain deposits and, most likely, lead to higher fees to pay for them. Socializing losses really can perilously muddle incentives for risk-taking. Yet readily available workarounds render today’s $250,000 insurance limit meaningless.

Treasury Secretary Scott Bessent, in a speech last month to community bankers, joined Democratic Senator Elizabeth Warren and others in support of raising deposit insurance to cover $10 million for business transaction accounts. A recently proposed bill in the Senate would authorize the Federal Deposit Insurance Corporation to do so.

This would be a case of law catching up to reality. A regulator-approved loophole means that many accounts already enjoy coverage far beyond the current cap. The method involves a bank spreading portions of a customer’s balance among its peers, each of which adds on an extra portion of insurance. By creating temporary overflow accounts, dubbed reciprocal deposits, this can effectively be structured as a swap between lenders that doesn’t increase either party’s total balances. The more banks are added to the swap, the higher the effective insurance limit.

So it is that SoFi Technologies SOFI.O advertises $3 million in FDIC insurance per customer, or Maryland-based Rosedale Bank claims up to $175 million, some 700 times the ostensible cap. After the toppling of Silicon Valley Bank and ensuing regional bank crisis, networks linking deposit-takers together expanded. IntraFi, the largest, now has 3,000 members. In total, U.S. banks held $428 billion in reciprocal deposits at the end of June, triple 2022’s level, according to Bankregdata.com.

Worse, since the fees that fund deposit insurance are mostly based on a bank’s total liabilities, such shuffling ups the government’s liability without forking over any extra premiums. Holding all else equal, this shortchanges Uncle Sam by some $500 million annually, Breakingviews calculates.

Critics of raising the cap are right about one thing: a bigger backstop really does invite moral hazard. A recent study found banks using reciprocal deposits tend to take riskier bets. The problem is that this is already happening. The Senate’s proposal would presumably further burden the FDIC’s already underfunded insurance pot, potentially requiring billions more in raised premiums. Granted, most of that cost would be borne by the six largest U.S. lenders, leaving incentives at smaller institutions still warped. Still, if the cap is already being ignored, it’s better to label the hazard clearly — and charge appropriately for it.

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CONTEXT NEWS

Last month, Treasury Secretary Scott Bessent joined Democratic Senator Elizabeth Warren and other lawmakers in support of raising the Federal Deposit Insurance Corporation’s $250,000 cap on insurance for deposit accounts. Bessent said that the Senate should push forward a bipartisan bill to increase the limit to $10 million for certain accounts.

More banks are using reciprocal deposits to up insurance coverage https://www.reuters.com/graphics/BRV-BRV/BRV-BRV/jnvwkykxjvw/chart.png

(Editing by Jonathan Guilford; Production by Maya Nandhini)

((For previous columns by the author, Reuters customers can click on GANDEL/ stephen.gandel@thomsonreuters.com))