I don't understand why there is so much focus on the insurance limit. I'm not sure if such limits are reasonable in the first place because they create somewhat problematic incentives: Assume a bank has plenty of assets, but is temporarily out of liquidity. Why wouldn't an insurer like FDIC force the bank to trigger the insurance policy, cap all deposits at the limit, and realize huge profits after taking over the bank and bridging the liquidity gap?
The FDIC doesn't cap all deposits at the limit when they take over a bank. That would be insanity.
What they do is insure all deposits up to the limit.
When a bank fails, the assets are used to pay out the depositors (similar to a bankruptcy). If the assets are enough to cover 90% of deposits, then depositors will be made 90% whole. The insured amount is the *exception* to this process, where your amounts below the insured limit will be made whole even when there is an asset shortfall.
I don't think the law would allow the FDIC to cap depositors at the insurance limit, even if the underlying assets are enough to make the depositors whole.
