A Bailout for Small Business?

The FDIC's bold new move.

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Yesterday the Federal Deposit Insurance Corp. announced that it will take the biggest step any part of the federal government has taken to "bail out" small businesses in the wake of the financial crisis. Forbes reports:

The FDIC will also expand deposit insurance for non-interest-bearing transaction accounts used by many small businesses. Many businesses that had accounts larger than the Federal Deposit Insurance limit, currently $250,000, were pulling accounts from smaller banks and moving them to larger, safer banks. Under the new program, the FDIC will provide full insurance coverage for non-interest-bearing accounts until the end of next year. Banks will pay a new premium to cover the expense of the program.

What are these "non-interest-bearing accounts," and why do they matter so much for small businesses? The Jacksonville Business Journal explains:

These are mainly payment-processing accounts, such as payroll accounts used by businesses that often exceed the current maximum limit of $250,000. This new, temporary guarantee, which expires at the end of 2009, will help stabilize these accounts, FDIC said.

The move will be funded by fees on banks, not taxpayers. So is there any catch? The FDIC is not a magic wand that can make all problems go away. John Berlau of the Competitive Enterprise Institute has argued that increasing FDIC guarantees can have some bad consequences down the road:

But wasn't too much confidence in the banking system in large part what got us into this mess? Deposit insurance, even at current levels, encourages "moral hazard" as consumers assume their banks are totally safe and don't look for quality as they do with investments and so many other products.

Here Berlau is talking about raising the FDIC's cap on deposit insurance, but the same problem could apply to these new guarantees for non-interest-bearing accounts. On the other hand, the fact that this FDIC move is temporary and will expire at the end of 2009 should partially address that moral hazard concern.