The Silicon Valley Bank collapse and its associated crises have already devastated the U.S. economy and investor confidence. Even this early, it’s worth asking: How can we prevent this from happening again?
The current American banking system offers depositors few realistic options for securing their money beyond the $250,000 FDIC limit. As a result, many businesses didn’t take adequate precautions.
There has to be a better way for people to protect their cash in bank accounts. Encouragingly, the outline of such a new system is coming into focus. The FDIC may begin to offer deposit insurance beyond its current limit–and there’s a chance for fintech and insurers to jump into the space with innovative protection products as well.
Finally, businesses might be able to take control of securing their cash. But before discussing that future, it’s important to understand how we got to this point.
Hypothetically, any company or individual could open an endless number of accounts to ensure all of their deposits are under the FDIC limit. But practically, this makes little sense.
This speaks to one of the fundamental principles of insurance: It needs to be easy to obtain–otherwise it’s useless.
I’m a perfect example of this. I run a fintech firm that helps companies offer embedded, point-of-sale insurance products to their customers. Yet despite building a career around helping people navigate risk, up until only six months ago we had 100% of our cash at Silicon Valley Bank.
“Have you considered spreading your funds to multiple banks?” my wife, a fellow entrepreneur, asked me one day. “Only $250,000 is protected by the FDIC.”
I told her it would be fine. I didn’t see any reason why a bank like SVB would fail.
My company, Tint, did take most of our money out of SVB before its failure, but only because we wanted to move it to a higher-yield account. Had we not done that, almost all of our assets would have been vulnerable.
The big question is: Why did I and so many of my fellow tech leaders not inoculate ourselves from this risk?
The truth is that buying insurance is not fun. It doesn’t make you any money–it only saves you from losing it. Most people don’t want to think about insurance if they don’t have to. When most executives are considering where to place their money, they usually end up using a bank that their peers are using and that enjoys a solid reputation. For many of us, SVB fit that description.
Humans are naturally quite bad at projecting and analyzing risk. We rarely think about what might happen if there is a sudden run on a bank and our deposits are in peril. Doing so would mean coming up with a plan for securing our funds. It would be complicated and time-consuming for us to spread millions of dollars between multiple accounts at multiple banks.
It appears that I’m describing a hopeless situation in which companies are doomed to place their cash in unsafe places. But it doesn’t have to be.
In fact, I’m optimistic that we’re about to see real, enduring change in the deposit insurance space. Tint does not sell deposit insurance products.
Earlier this week, the New York Times reported that members of Congress are discussing the idea of lifting the $250,000 cap on FDIC deposit insurance. This is an intriguing idea. But even if the FDIC doesn’t raise its cap, organizations that wish to secure their funds beyond the FDIC limit should be able to do so in a practical and financially sustainable way.
That might mean paying premiums to the FDIC for additional insurance beyond the current limit. This FDIC-plus service could be offered via banks when customers open accounts.
But there’s reason to doubt whether the FDIC, as a government-run entity, is best positioned and incentivized to solve this problem. Ideally in a capitalistic economy, private entities are more capable of providing a satisfactory solution.
Fintechs, for instance, could offer accounts with enhanced protection at additional costs. Depositors would have to accept strings attached to such plans to prevent future bank runs. For example, that might look like restricting customers from withdrawing more than a certain percentage of their deposits all at once. And to add another layer of security, the FDIC could act as a sort of reinsurer to backstop a run on deposits.
Another possibility is that insurance companies themselves could offer third-party protection plans on top of bank accounts. Restrictions might apply there, in terms of not offering coverage to banks that are not adequately capitalized.
As we’ve seen with innovation in other sectors, if startups are successful in offering such innovative deposit protection plans, traditional banks would likely follow. It’s not hard to imagine JPMorgan Chase and Citi offering add-on insurance for new customer accounts in a few years.
Almost all disasters are accompanied by a silver lining. With this one, it may be the creation of a more robust, safe system for protecting our money.
Matheus Riolfi is the co-founder and CEO of Tint.
The opinions expressed in Fortune.com commentary pieces are solely the views of their authors and do not necessarily reflect the opinions and beliefs of Fortune.
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