Legislation was introduced in the U.S. Senate last month that would raise the federal deposit insurance limit on non-interest-bearing transaction bank accounts (accounts typically used by businesses) from $250,000 to $10 million — that’s a whopping 4,000 percent jump.

Many mid-size and regional banks argue that this drastic move is necessary because they have been put at a competitive disadvantage due to the regrettable implicit federal guarantee backstopping the so called Too Big to Fail (TBTF) money center banks. The measurable deposit flight that took place after the failures of Silicon Valley Bank, Signature, and First Republic in 2023 is strong evidence that they may be right.

Treasury Secretary Scott Bessent has now indicated he supports efforts to raise the limits. He shouldn’t. It’s a bad idea for both taxpayers and the economy and is fraught with moral hazard.

The Federal Deposit Insurance Corporation (FDIC) was born out of the Great Depression when over 9,000 banks failed due to massive runs. To restore confidence in the banking system, federal deposit insurance was instituted in 1934 on member bank accounts up to $2,500. This would equate to $58,000 today as adjusted for inflation. At the time even New Deal architect President Franklin Roosevelt expressed concerns regarding the new program stating “we do not wish to make the United States government liable for the mistakes and errors of individual banks and put a premium on unsound banking in the future.” Regardless of what good may have been done in the moment, FDR’s fears have indeed been realized.

Regulatory judgement and fiat remain poor substitutes for market discipline. If banking regulators were omniscient managers of financial risk, we arguably would have never experienced the S&L crisis of the ‘80’s or the Great Financial Crisis of 2008. Leading up to the Great Financial Crisis, banking regulators placed almost zero risk weighting on mortgage-backed securities and sovereign debt, which were at the epicenter of the crisis. Our banking regulators themselves have certainly on more than one occasion, “put a premium on unsound banking practices.”

Although premiums for federal deposit insurance are assessed on banks, like any other cost of doing business bank depositors ultimately pay the cost. Given Uncle Sam’s poor track record as a risk insurer, the taxpayer usually has to pay as well. The FDIC’s Deposit Insurance Fund (DIF) has already become insolvent on multiple occasions and been bailed out.

Additionally, the National Flood Insurance Program (NFIP) remains underwater — pun intended — is chronically insolvent and owes the Treasury roughly $22 billion. The Pension Benefit Guaranty Corporation, which is the federal government’s insurer of private defined benefit pension plans, has a present value gap on the order of $100 billion according to the Congressional Budget Office. Perhaps most alarmingly, the Social Security combined retirement and disability trust fund is projected to be depleted by 2034, and the Medicare Part A hospital insurance fund is projected to be depleted one year earlier. For a nation already carrying a worsening and unsustainable debt, increasing any federal insurance exposure will not end well for taxpayers.

The more depositors who have skin in the game and are thus fully incentivized to find safer banks, the safer our banking system will be. There are numerous respected financial firms that rate banks’ safety and soundness, just as there are private firms that sell deposit insurance. Businesses that carry millions in their transaction accounts can no doubt afford to purchase these services without a taxpayer backstop.

Before it gets lost in the debate, it is important to note that the insured deposit legislation is not about protecting the proverbial moms and pops. 99 percent of all federally insured bank accounts are already under the current limit of $250,000. Nor is the proposal about protecting mom and pop’s small business. For example, a recent survey of the National Federation of Independent Businesses reported that two-thirds of small businesses keep less than $250,000 in their transaction accounts; nowhere near the new $10 million proposal.

Regional and smaller banks no doubt play an important role in our economy, particularly for small businesses and middle market companies – not to mention commercial real estate. It is regrettable that a small group of banks are implicitly TBTF, but it will be difficult to ever get that genie back in the bottle. To address bank regional bank competitiveness, President Donald Trump already signed into law legislation in 2019 that significantly reduced the regulatory burden on small and mid-size banks. Fortunately, there are bills pending in Congress to further streamline and lower these non-TBTF regulatory burdens even more.

In place of increasing federally insured deposit limits, policy makers should also be looking for ways to invigorate and make even more competitive the private deposit insurance market for business accounts. Additionally, Congress must seek ways to destigmatize use of the Fed’s discount window and have it reengineered to better provide instantaneous liquidity for solvent banks threatened with instantaneous runs.

In Washington, the policy cure is often worse than the underlying illness. We need more market discipline, not less, to make our banking system safer. An expansion of deposit insurance limits sends us in the complete wrong direction.