After SVB suffered a bank run, depositors worried about the safety of their money at other banks. This led to some odd things, like small companies thinking they need to do bank analysis. From the WSJ:

“I think we need to analyze banks just like they analyze us,” said Brent Frederick, owner of Minneapolis-based Jester Concepts, which has five restaurants including Butcher & the Boar and a concession operation that includes food trucks, a food trailer and stadium locations. “What is the bank’s core value? What do their balance sheets look like?”

Some feel that depositors shouldn’t have to worry about this, and that they should be protected to a greater degree than they are today:

Senator Elizabeth Warren is calling for more US deposits to be covered by federal insurance…“I think that lifting the FDIC insurance cap is a good move,” Warren, who’s a member of the Senate Banking Committee, said in a CBS News interview.

But others, like North Carolina Republican and House Financial Services Committee chair Patrick McHenry, were scandalized by this suggestion:

“Well, it’s the first time I’ve heard a proposal like that…and I have not had a single conversation with the White House or the administration about deposit insurance, changing the levels.”

This is surprising. Americans have been debating just about every aspect of deposit insurance, including the cap, for centuries. 

Here is a brief history of that debate, told primarily through the press at the time, categorized by concern.

Moral hazard

SVB’s failure brought out vocal opponents of deposit insurance. Here for example is Citadel’s Ken Griffin arguing that depositors should have been allowed to sustain losses, in the FT:

“It would have been a great lesson in moral hazard,” he said. “Losses to depositors would have been immaterial, and it would have driven home the point that risk management is essential.”  

(Citadel suspended redemptions from its hedge fund in 2008; as they say, there are no atheists in the foxholes).

Griffin echoes Adam Pozen, writing for Brookings in the aftermath of the 2008 meltdown:

By raising the maximum insurable amount to $250,000 per account, we will lose the market discipline exerted by these wealthy individuals and experienced business people...with a 100% guarantee from the federal government, why would they care whether the bank made imprudent loans or bought risky bonds?

Similar opposition was raised during the establishment of the FDIC during the Great Depression. From an editorial in the New York Times in 1941:

When Federal insurance of bank deposits was started in 1934 a good many bankers regarded it as a highly dubious experiment, calculated to put a premium on unsound banking. 

But worries about moral hazard predate the FDIC. In a 1913 debate about establishing a “fund to be drawn on for the satisfaction of the claims of depositors in failed regional banks”, Senator Weeks of Massachusetts objected:

I should never favor any kind of guarantee on deposits…the safe and sane banks would be taxed as heavily as the ill-managed institutions. They would really be taxed for the protection of those reckless banks, whose reckless offers of high interest and other inducements might be drawing business everyday from the sound institutions.

Going even further back, concerns about moral hazard can be found in the earliest discussions of deposit insurance in the United States almost 200 years ago. 

The New York Safety Fund, established in 1829, compelled banks to hold 3% of their capital in reserve to cover non-shareholder liabilities for failed banks. From a 1910 account of the debate in Congress surrounding the creation of the fund:

Another representative, Mr. Hubbell, pointed out that the very existence of such a fund would relax “public scrutiny and watchfulness which now serve to restrain or detect malconduct.” This argument appealed to many then…many were sure that the "bank fund" would put a premium on reckless banking…

Financial stability

Many have argued that moral hazard is the price for financial stability. Here is Joseph Stiglitz writing in project syndicate:

Some will say that bailing out SVB’s depositors will lead to “moral hazard.” That is nonsense…ordinary depositors are not supposed to be managing bank risk; they should be able to rely on our regulatory system to ensure that if an institution calls itself a bank, it has the financial wherewithal to pay back what is put into it.

People have made this argument over the years, too, especially following banking crises.

The SVB of 1975 was Franklin National Bank, which collapsed when it was unable to rollover certificates of deposit funding. It was the largest failure of an FDIC-insured bank until then. From the New York Times that year:

…nothing approaching a collapse occurred and the confidence of ordinary depositors evidently remained largely unimpaired. It was an extraordinary tribute to the efficiency of deposit insurance, which many economists believe may have been the single most important reform of the New Deal.

The FDIC was established during the Great Depression, after “recent events had shown that a system of federal deposit insurance was necessary to achieve and maintain financial stability”, but the argument that the benefit of stability outweighs the cost of moral hazard far predates it. 

Following the bank panic of 1907, an editorial in the Los Angeles Herald arguing for the establishment of deposit insurance:

The fact that well conducted banks under the new system would be required to make a slight annual contribution to cover the losses of some badly managed banks is simply part of the inevitable price to be paid for an incalculable benefit. Honest business men who carry fire insurance necessarily contribute to pay losses occasioned by rascally property owners who set fire to their own buildings.

And from the debate surrounding the establishment of the New York Safety Fund, in 1829:

The committee which presented the bill predicted that the new system would impart stability and currency to the circulating medium, [and] prevent runs on banks... 

Can depositors detect excessive risk-taking?

SVB was sitting on a powder keg of long-dated, volatile government debt. Regulators didn’t flag this risk. Neither did rating agencies. Moody’s assigned SVB an A1 rating until the moment it collapsed. If regulators, supervisors, and rating agencies struggle to identify unsound banks before they fail, can we really expect depositors to make that distinction?

At the height of the Savings & Loan (S&L) crisis, in 1990, in a New York Times editorial:

Professional investors and security analysts were unable to predict which savings and loan institutions would fail. How could ordinary depositors be able to tell which banks are sound? 

This logic was also used to question the value of regulation itself. In 1829, opponents of the New York State Fund—and of regulation—argued:

…experience has demonstrated that when bank officers are honest, commissioners are unnecessary; when they are dishonest, commissioners are unavailing.

What’s the right level of deposit insurance?

Senator Warren argues for raising the current $250,000 insurance deposit cap, but has not specified how high, saying “this is a question we’ve got to work through. Is it $2 million, is it $5 million, is it $10 million?” 

This too has been debated before. From the New York Times in 1985:

Arguing for an increase, the FDIC chairman addressed the moral hazard argument in 1963, proposing setting the cap high enough to leave some deposits uninsured:

To arguments that deposit insurance might cause some financial institutions to become lax, Mr Cocke notes that some $150 billion from big depositors would still be uninsured.

Today’s proponents of higher deposit insurance argue that it is the riskiness of banks that necessitates deposit insurance. But in 1950, Treasury secretary Snyder reversed this logic, suggesting that it was the soundness of the banking system which allowed a higher deposit insurance cap:

So long as we have the wisdom and courage to avoid the excesses of speculation and credit expansion…our banking system will never have to meet a crisis comparable to that which motivated the Congress creating the Federal Deposit Insurance Corporation.

In the debate preceding the establishment of the FDIC, Roosevelt had suggested graded levels of insurance:

President Roosevelt’s proposal for insuring bank deposits includes a 100 percent guarantee on sums up to $10,000, a 75 percent backing for sums between $10,000 and $50,000, and a 50 percent guarantee on sums of $50,000 and more…

Using the private sector for deposit insurance

SVB’s failure raised another time-honored question—should government administered insurance be provided by the private sector instead, as it is in Massachusetts? From Vox:

Since 1934, not a single depositor at an insured bank in Massachusetts has lost a dime. All deposits above the $250,000 federal limit are insured by a private entity — the Depositors Insurance Fund (DIF). 

From The New York Times in 1988, as the S&L insurer FSLIC was falling into deficit:

A great deal of attention has been focused on the multi-billion dollar deficit in the F.S.L.I.C. insurance fund. Unfortunately, however, the question of how to treat the disease has been lost in an excessive discussion of the symptoms. The cure, however radical, is simple: Government deposit insurance should be replaced by private insurance.

In 1913, more than twenty years before the FDIC was established, Senator Weeks of Massachusetts argued: 

I should never favor any kind of guaranty of deposits…unless it was a plain case of insuring deposits with some regular insurance company. In such a case the company with fix rates varying, according to the risk, and that would make it fair.

In 1908, in the context of bank deposit insurance in Nebraska, a fire insurance executive argued that the moral hazard of weak bank deposit protection—then, against bank robberies—could be quantified, and banks charged for this risk:

Present statistics on bank robberies and defalcations ought to furnish a fairly good basis for tables showing averages not unlike mortality tables in life insurance; and in time these could be brought to a condition so nearly perfect that the premium rates for the insurance of a bank could be fixed to a nicety for all classes of banks…

***

Congress is now debating all of this: how much deposit insurance, at what cost, and for whom. But this has been an ongoing debate for almost 200 years. If and when changes are made, they will surely happen over the objections of a vocal opposition. Like gun control and abortion, deposit insurance seems to be one thing we just can't agree on.