- Raising the FDIC's insurance limit in the aftermath of SVB's crash might not be a catalyst for a stock market rally.
- Barclays notes there have been seven times since the 1930s that the insurance coverage cap was increased.
- "Could this catalyze a broad rally in risky assets? Historical evidence is evasive at best," said Barclays.
Regulators stretching beyond the FDIC's $250,000 insurance limit to protect accounts at failed Silicon Valley Bank and Signature Bank appeared to dampen contagion risks but Barclays says raising that coverage cap may not spark a sustainable rally in stocks.
"What if FDIC insurance cap was lifted? Equity investors should not hold their breath," Anshul Gupta, a global equity derivatives strategist at Barclays, wrote in a research note published Tuesday.
While the banking crisis appears to be increasingly under control, it wanted to look at the impact a potential raising of the FDIC limit would be on equities, the investment bank said.
"Could this catalyze a broad rally in risky assets? Historical evidence is evasive at best," said Gupta.
The $250,000 limit has been on the collective mind of Americans after the first bank seizures since the global financial crisis. Senator Elizabeth Warren, part of the Senate Banking Committee, said last month it would be "good move" to raise the insurance cap, suggesting a potential range of $2 million to $10 million.
Former US Treasury Secretary Steven Mnuchin also said coverage should be raised and Representative Maxine Waters, the top Democrat on the House Financial Services Committee, said Congress should think about bumping up the limit.
Even NBA star Giannis Antetokounmpo said as a rookie, he spread his money across a number of banks because of the FDIC's insurance limit.
Barclays looked at seven times the FDIC coverage limit was raised since the 1930s and found the S&P 500 usually experienced negative returns ahead of such moves, suggesting limits are typically pushed higher in response to a crisis.
"In the immediate aftermath of the limit increase, S&P experienced wildly different paths, suggesting that raising the limit was not always successful in soothing the equity market," Gupta wrote.
Stocks ultimately posted strong recoveries, with Barclays finding the S&P 500, on average, posted a 22% gain in the year and a half after the FDIC lifted the insurance cap. That was in line with long-term expectations given the poor returns ahead of coverage increases, it said.
"However, there's no evidence that the limit raise itself catalyzed the move. Indeed, the eventual relief rally is in line with what is expected given the magnitude of the fallout preceding the insurance cap lift," Gupta said.
FDIC insurance limits took place in July 1934, six months after the FDIC was established, September 1950, October 1966, December 1969, November 1974, March 1980, and October 2008, during the height global financial crisis, according to American Deposit Management Co., a treasury management and financial services company.
The S&P 500 scored a 3.5% increase in March, even as the SVB and Signature Bank failures rocked the banking industry. Big Wall Street banks rushed in with a $30 billion rescue package for First Republic Bank. On Tuesday, JPMorgan CEO Jamie Dimon cautioned the turmoil in the US banking system wasn't over yet.
