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Customer deposits of more than $250,000 at 2 failed banks will be guaranteed

SACHA PFEIFFER, HOST:

Two hundred and fifty thousand dollars - that number has become the subject of a heated debate.

LEILA FADEL, HOST:

When two banks - Silicon Valley Bank and Signature Bank - failed, the federal government jumped in to guarantee deposits greater than $250,000 - amounts that aren't normally insured. Was this a bad precedent or necessary to keep the financial system stable?

PFEIFFER: Here to walk us through that is NPR's Arezou Rezvani. Hi, Arezou.

AREZOU REZVANI, BYLINE: Hi, Sacha.

PFEIFFER: So tell us how FDIC insurance would normally work.

REZVANI: So for years, $250,000 has been the limit. Anything under that has long been fully protected by the government's FDIC. Anything over is considered uninsured. Banks pay fees that go toward an insurance fund, and that's what's used to pay people back should a bank go belly up - again, up to $250,000. Now, there was an exception made over the weekend to go well beyond that limit. The FDIC tapped into that fund - that insurance fund - to pay the customers of the two collapsed banks back in full, which basically means that those previously uninsured portions suddenly became guaranteed.

PFEIFFER: And what is the point of the FDIC saying that there are limits to what it will insure when, as we're seeing in this case, it's actually willing to go beyond that?

REZVANI: Well, these limits were designed to keep people from thinking they would always be saved. I talked to Sheila Bair, who ran the FDIC during the 2008 recession. Here's how she put it.

SHEILA BAIR: It's a question of moral hazard. For wealthier people or companies, large organizations, that will have bigger deposits, you want them to look at the bank carefully, kick the tires, make sure it's a safe place.

REZVANI: So the government wants customers to scrutinize their banking institutions and not get too comfortable with the idea that the government is simply going to intervene every time things go sideways. But regulators argue that they had to make an exception this time because there were signs that panic was spreading, and this was the only way to keep the financial system stable.

PFEIFFER: But, Arezou, now many people are likely to think that they're always going to be saved if their bank fails. So has the FDIC created a precedent here?

REZVANI: Yes, that is the concern. Because of the FDIC's intervention, if other banks run into trouble in the days or weeks to come, the fear is that there will be greater pressure on the FDIC to step in and save those uninsured deposits as well. This has sparked a huge debate about when to go above and beyond the standard guarantees of $250,000 and for whom? You know, is it the ultra-wealthy? Is it the institutions that cater to a lucrative industry? Or could it be that it's the opposite? Is our financial system such that any bank nowadays is really too big to fail?

PFEIFFER: And what do we know about whether there are other banks out there also at risk of failing?

REZVANI: Well, Silicon Valley Bank and Signature Bank were unique in many ways. They were the banks of choice for tech startups and those in the cryptocurrency space, whereas other banks have a much more diverse clientele. As we know, tech companies have been hurting a lot lately and downsizing. Crypto has, of course, run into major problems in recent months. These tech and crypto companies started pulling their deposits out of these banks at a time when the banks were seeing losses in their investments in government bonds. Those bonds, which are normally safe, lost value to climbing interest rates. And that is what put the banks in a squeeze.

Former Fed officials and regulators I've spoken to, they do wonder if other banks have not properly accounted for interest rate hikes in their investments. Those moves may have been OK a year or two ago. These days, maybe not so much.

PFEIFFER: That's NPR's Arezou Rezvani. Thank you.

REZVANI: You're welcome. Transcript provided by NPR, Copyright NPR.

Arezou Rezvani is a senior editor for NPR's Morning Edition and founding editor of Up First, NPR's daily news podcast.