Upping FDIC insurance may hurt market for T-bills

NY Times:

An obscure proposal to increase federal insurance on bank deposits won the support of the Bush administration, both presidential candidates and Republican and Democratic lawmakers on Tuesday, in a major lobbying coup for community banks.

At the same time that the measure was being hailed by Democrats and Republicans as a way to rescue the rescue plan, thousands of independent bankers scrambled to drum up support for the package in communities across the country.

The chairwoman of the Federal Deposit Insurance Corporation, Sheila C. Bair, gave a ringing endorsement for the concept of increasing the limit on insured deposits to $250,000 from $100,000, at least temporarily.

She was following the presidential candidates, Senator Barack Obama and Senator John McCain, who had announced their strong support for the idea earlier in the day.

Republicans and Democrats vied to claim the popular idea as their own. Republican lawmakers said they had championed it during last weekend’s heated negotiations over the scope of the bailout bill, but that Democratic leaders had rejected it.

Democrats said they had no recollection of that provision being proffered in the chaotic talks, but top Democratic Congressional aides said the leadership was willing to add it to the bill and knew of no opposition.

Increasing the cap on deposit insurance, proponents say, would bolster confidence in the banking system and would help small-business owners, who often keep more than $100,000 to meet payroll or for daily operations.

...

It may be helpful to small businesses. Large depositors such as municipalities doing capital improvements already require banks to secure their deposit with the purchase of government securities like T-bills. I think the same is true of most large corporations. What this will mean is that fewer government securities will be needed to secure those deposits.

As a confidence building step it will probably halt some of the runs on banks that are perceived to be in trouble.

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