The Regressive Cross-Subsidy of Uncapping Deposit Insurance

There's talk about removing the FDIC deposit insurance caps in response to the "Panic of 2023"®.  There's a refreshing realism about such a move. But let's also be clear about the distributional impact of such a move:  it's a huge cross-subsidy from average Joes to wealthy individuals and businesses.

If FDIC insurance coverage caps are removed, banks will pay more in insurance premiums. They will pass those premiums through to customers because the market for banking services is less competitive than the market for capital. In particular, the higher costs for increased insurance premiums are likely to flow to the least price-sensitive and most “sticky” customers:  less wealthy individuals.  So average Joes are going to be facing things like higher account fees or lower APYs, without gaining any benefit. Instead, the benefit of removing the cap would flow entirely to wealthy individuals and businesses. This is one massive, regressive cross-subsidy. It's not determinative of whether raising the cap is the right policy move in the end, but this is something that should be considered.