Recent bank failures have shined a spotlight on a thorny question: Is it time to overhaul the federal deposit insurance program?

The failures of Silicon Valley Bank and Signature Bank last month exposed weaknesses in the system, including too many uninsured deposits at some institutions and the propensity of jittery depositors to transfer money at the drop of a hat.

Gone are the days captured by grainy Depression-era newsreels when anxious customers had to stand in long lines outside of branch offices in hopes of getting their money back. Now, depositors can spark bank runs by clicking a few buttons on their cell phones. The speed of customer reactions creates new pressures for the deposit-insurance system, as it marks its 90th anniversary.

This could warrant significant changes for how the Federal Deposit Insurance Corp. and its credit union counterpart, the National Credit Union Administration, oversee their programs. Should the basic insurance of $250,000 per depositor go up, be left alone or even get lowered? How should the banking industry pay for this coverage? Should different types of customers receive different treatment?

The last question is intriguing because regional banks such as Silicon Valley cater to a lot of small businesses, many of whom exceed the FDIC limit covering no more than $250,000 in deposits for a customer at a given bank (though customers can receive additional insurance if they split their money using multiple ownership arrangements such as joint accounts or retirement accounts).

Insurance for $250,000 in deposits is "way more than enough for most households,” said Thomas Philippon, a finance professor at New York University. But it might not be cover a business needing to meet payrolls, buy equipment or make other large transactions.

In a recent webinar debate on the topic, he suggested providing different insurance amounts for different types of customers — small businesses versus households, for instance, or business transactional accounts versus steady-balance savings accounts.

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The webinar debate was sponsored by the Brookings Institution's Hutchins Center on Fiscal and Monetary Policy and the University of Pennsylvania’s Wharton Initiative on Financial Policy and Regulation.

Should deposit insurance have any limits?

Deposit insurance has increased in fits and starts over the years, mostly recently to $250,000 during the financial crisis of 2008 from the prior level of $100,000, where it had remained since 1980.

Prasad Krishnamurthy, a professor at the University of California Berkeley School of Law, favors raising the $250,000 cap to an unspecified amount. Recent decisions by regulators to cushion uninsured depositors from losses effectively render the $250,000 limit moot anyway, he argued.

Uninsured depositors at Silicon Valley Bank and Signature Bank didn't lose money, but allowing that to happen caused a $20-billion hit to the FDIC's insurance fund, with repayment of the expense to come from higher premiums or fees levied on the banking industry. Treasury Secretary Janet Yellen invoked a special rule that extended insurance to deposits above $250,000 at the two banks.

“Whether we like it or not, deposit insurance for the 'uninsured' does in fact exist,” Krishnamurthy said.

While Yellen's move did cover uninsured deposits at Silicon Valley Bank and Signature Bank, there's no assurance future bank failures get the same treatment, noted Patricia McCoy, a Boston College law professor.

“Our current approach creates uncertainty” among bankers as to whether their uninsured depositors would be made whole in the event of another failure, McCoy said. “This uncertainty is a good thing,” she argued, helping to keep bankers from taking reckless risks that could sow the seeds for “more and worse financial crises in the future.”

Besides, she said, moving to a system of unlimited deposit insurance could cost even more for banks required to pay additional deposit insurance premiums, and it would require more regulation. “Can the U.S. afford total deposit insurance, and who would pay?” she asked.

Should regulators let uninsured depositors lose money?

The vast majority of Silicon Valley Bank's deposits, roughly 90%, were uninsured. The bank was an outlier in this regard, but other banks also have hefty chunks of deposits that a failure would threaten, Philippon noted. About 43% of all deposits were uninsured at the end of 2022, according to FDIC data.

Much of the debate over the banking system boils down to whether the Federal Reserve, Treasury Department and other regulators should let the free market sort out its problems, even if those problems spill over into the broader financial system and economy. Moral hazard is the tendency of bankers or others to ignore risks if they think they're protected or insulated from the consequences.

Uninsured depositors need to absorb some losses in the event of future bank failures (as they have in some prior failures) for the system to work.

"If you want to send a signal to the market that some costs are going to be imposed on uninsured depositors, you have to make that threat credible at some point," Krishnamurthy said.

Reach the writer at russ.wiles@arizonarepublic.com.

This article originally appeared on Arizona Republic: Bank failures raise question of whether to raise FDIC insurance levels