uberaverage: Anyone with more than 250k in the bank needs to buy stocks with the rest to prop up my 401(k).

Any individual with more than 250k in a deposit account needs to look at some investments. Bolded because that caveat is important.

Corporations, however, often need more in the account when paychecks go out. This was a factor in SVB, there were a lot of Silly Valley companies banking there - both IT companies ordered to by their VCs and other companies who were looking for a large, low-fee bank for corporate accounts, and the $250K limit meant that, on that Friday the 10th and Wednesday the 15th, there would be a lot of people seeing their paychecks bounce.

This would have been financial cataclysm. What do you think happens when all of a sudden a significant fraction of workers and companies find that their paychecks and their accounts payable checks bounce because SVB died and the $250K limit came into play? What would be the state of banks right now?

The problem here is that the wealthy are moving their investment accounts out in large amounts, which is stressing the bank's cash reserves.

Now, there are banks that don't have a strong investment portfolio, and funny enough, they're fine. Ditto credit unions. But there are a number of banks who are being forced into a bad cash position by a combination of a heavy treasury load that's now a painful loss if they sell AND people with real money fleeing to "quality."

(Once upon a time there were rules about deposit banks having investment arms, they had to be basically separate so the investment bank wouldn't harm the deposit bank, but GOP happened.)

What these banks are hoping to prevent (and I'm willing to be at least one won't be able to) is corporations and individual fleeing with their cash as well, which would certainly end them in the same way that SVB went down. A real question is will that matter to banks who also offer large investment accounts, because those accounts aren't protected....and people are fleeing to quality with those investments.

IDisposable: This means that if I have $1 million in the bank, I'd be a fool not to move it to a big bank.

People who understand how DEPOSIT insurance works don't follow you. Because, well, if that is a deposit account, they have someone put it into several banks, each at the $250K limit, and more importantly, why would you leave $1M in a deposit account that pays fark-all in interest?

They're moving to the big banks REGARDLESS of the Feds backing FDIC insurance for the total amount of the deposit insurance because they don't have $1M in a deposit account, they have most of that in an INVESTMENT account which is in no way protected by FDIC, and if the bank fails they are, at best, waiting months to get any of that money.

Now, there is one class of bank users that does have large balances in deposit accounts - corporations who are moving money into those accounts to handle payments for goods and services, and to pay employees. If you're writing $750K worth of payroll every payday, you need to have $750K in that account when the checks hiat. These accounts are vulnerable to the $250K limit, and worse, the penalties for bouncing paychecks are often nasty. They often have a large money-market account as well and sweep money into the payroll and accounts payable accounts when needed, that way. That's covered by FDIC...to $250K, but that means nothing if you know there's a couple of million in payments and paychecks happening soon.

Bouncing paychecks is also bad for people who get paid by them. Some can weather a couple of weeks/months for the storm to subside but many other are farked if that paycheck bounces. Yes, the ones who can weather the storm will often be paid more because they were paid late, but that's little compensation when you have nowhere to live and nothing to eat because you are living paycheck-to-paycheck.

So:

The wealthy? They're moving anyway because FDIC means nothing to them, they just want their money out. Covering 100% of deposit accounts helps them none. Covering the investment accounts is a massive bailout to the rich for failed investments and the right answer if the Feds do that is pitchforks and torches. However, the Feds know this, so they won't.

The not-wealthy? They're covered, and if you have more that $250K in an account do something about that. I'm recalling that if it's a joint account with a spouse you both get the $250K but IIRC often equals IIRC, but I didn't....so confirm that before relying on it, but if you have over $250K in a checking account, do something to make sure that IF your bank has a run, your money will be available. In fact, do something so that inflation isn't destroying the value of that money.

Corporations using deposit accounts? They HAVE to move if the accounts aren't certain to be safe because they cannot afford what happens if all their accounts drop to $250K in a bank failure, because they have to write checks that must clear - when they pay for things and whey they make payroll, which is usually every two weeks or twice a month, but there are weekly and monthly payroll cycles as well.

So, getting FDIC to cover the entire deposit account, not the first $250K, keeps corporations from moving their deposit accounts. It also probably helps consumers not do so as well, even though they're entirely covered, a big part of bank runs is basically people panicking.

And that's why the mid-tier banks want this. They can't stop the investment accounts leaving, and if they have too much invested into those accounts, they might be doomed regardless. But if they also lose corporate customers trying to safeguard their ability to pay for things/pay workers, and individuals afraid because all the rich people and companies are leaving.....they're farked.

They may be farked anyway - all depends on their account ratios. But if everyone leaves, they're proper farked.