A proposal to increase federal bank deposit insurance to $10 million on non-interest-bearing transaction accounts in community and regional banks has gained momentum in Congress and with the Trump administration.  

If enacted, it would raise the limit on transaction accounts for businesses and municipalities from its current $250,000 limit. This could eliminate the need to secure collateral or otherwise protect these accounts for the overwhelming majority of public agencies whose transaction account balances are less than $10 million. 

  • Treasury Secretary Scott Bessent endorsed the expansion of insurance in testimony last week before the Senate and House committees that oversee banking. Bipartisan legislation to accomplish this—the Main Street Depositors Protection Act (S. 2999)—was introduced last year by Senator Bill Hagerty (R-TN) with sponsorship from Senator Angela Alsobrooks (D-MD).  (  See our December 25, 2025  post for a deep dive into this proposal.)
  • The increase would apply to all but the nation’s 15 or so mega-banks banks, giving community banks a balance to the “too big to fail” status of the very largest institutions.
  • For the vast majority of municipalities, perhaps 95%, this change could eliminate the need to secure and manage collateral for vital bank accounts that support municipal operations. Securing taxpayer funds is a desirable goal but doing so with collateral programs whose requirements vary by state is inefficient and burdensome.
  • The mega-banks argue that this would advantage smaller institutions in offering payments processing and similar services because the related transaction accounts could be secured. Indeed an explicit objective of the Hagerty/Alsobrooks bill and an element of Bessent’s endorsement is to boost community banks. 

The Details

The failure of Silicon Valley Bank and several others in 2023 triggered a run on deposits in smaller banks and extraordinary actions by the Federal Reserve and Treasury to shore up the financial system.  It also led to calls on the Federal Deposit Insurance Corporation to re-think its bank insurance program.

A May 2023 report by the FDIC recommended a targeted insurance expansion, applying a higher limit to non-interest-bearing transaction business accounts.  In the public sector these transaction accounts, used to collect taxes and fees and pay payrolls and operating expenses, represent more than half of bank deposits.  They are part of the plumbing of government, and they have seen strong growth in balances over the past five years even as interest bearing deposits in banks by public units have declined.

Collateralizing transaction accounts fully and efficiently is challenging because their balances change, often within a single day.  In many cases collateralization may be insufficient, if only overnight or for a few days, until things catch up because of the costs of over-collateralization and logistics of assigning and moving collateral. (Never mind the possibility that this opaque process could be compromised by a “bad” bank officer.) 

The result?    As a practical matter public units trust that they are collateralized on a continual basis, often relying on periodic (weekly or monthly) collateral reports, but public agencies find it difficult or impossible to verify this.  And outside audits do no more than spot check for verification.

Trust is fine (though maybe not strictly in compliance with legal and fiduciary responsibilities), under normal circumstances where a solvent bank is involved, but banks can become insolvent with little warning.   Even a regulator or sophisticated depositor who continually studies a bank’s financials may miss the red flags until it is too late.  Assessing solvency of smaller banks, which may not be publicly held and do not have credit ratings, is way beyond the skillset of most treasurers and public funds investment managers.    When red flags show, a depositor might pull its non-transaction deposits (interest earning CDs, etc.) quickly but it’s often not possible to do the same for accounts that support operations like tax collection and payrolls.

Depositors who recognize the “sticky” nature of these accounts might logically choose to place their non-transaction accounts with the mega-banks.  Indeed, our research covering several states that have state-administered collateral programs concluded that the big banks have a large and growing share of public unit deposits.

So, it’s no surprise that the proposed expansion of insurance is supported by the community banking groups who represent smaller banks that saw a flight of deposits after the Silicon Bank failure. The change does not have the support of the nation’s largest banks, whose “too big to fail” profiles seemingly provide comfort to depositors, and who gained deposits during the 2023 bank failure.

Bottom line

Public agencies and the government associations that represent them in Washington should express support for moving this bipartisan proposal through Congress.  It’s an initiative that  has broad bipartisan support and support of the Trump administration, something that is altogether too rare these days.

As they say, write to your Member of Congress.

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Coda

Meanwhile. . . The Year’s First Bank Failure

The failure of Metropolitan Capital Bank & Trust happened suddenly. Regulators closed its doors on Friday, January 30 and its assets and liabilities were assumed by a Michigan-based bank over the weekend.  This was the first bank failure of 2026. It’s not positive, but a reminder that banks do fail and that failures can happen without warning.

Metropolitan had $261 million of assets when it was closed.  Its most recent regulatory report showed $11 million in public unit deposits.   The Illinois Department of Financial and Professional Regulation announcement of the closing of the bank said that all customers would have immediate access to their deposits.  So, the public unit depositors were fully protected. Whether this was by insurance or because of collateralization is not clear at this point and a department spokesperson declined to elaborate.

But as we learned in 2024 when the First National Bank of Lindsay, Oklahoma failed amounts in excess of insurance limits may not be recovered.  This too was a small bank, flying below the radar of regulators, so to speak.

The point in reciting the unfortunate story of Metropolitan Capital is that failures are not a thing of the past; they can and do happen in the community bank space.  Insurance is the sleep well means to secure these deposits.  Without that, things are complicated