My understanding is that the FDIC does not have cash on hand to cover "unlimited" amounts. My (somewhat dated reference, 2010) said they have about $0.70 for every $100 insured, based on the idea that the number of depositors they would have to cover at any single time is relatively small. Similar to the idea that banks don't have to have enough reserves because depositors won't all request to pull their funds at the same time.
Or am I wrong on that understanding?
In reality Congress would step in, but they did the above for SVB.
See 5-(c): https://www.law.cornell.edu/uscode/text/12/1817
> In addition to the other assessments imposed on insured depository institutions under this subsection, the Corporation may impose 1 or more special assessments on insured depository institutions in an amount determined by the Corporation if the amount of any such assessment is necessary—
(C) for any other purpose that the Corporation may deem necessary.
Practically this means that FDIC can levy on the banks for some amount more that won't crash the banks; anything above that and they'll be going to Congress, or the Treasury will do some trickery.
Now the FDIC has indicated that it will insure deposits in unlimited amounts doing a direct deposit maybe a more attractive option to banks? That $30B previously was sitting around at the Fed earning a risk free return at prevailing interest rates. I have to assume that there is special treatment here and the banks are earning above market returns and the banks didn’t put cash-at-risk sitting in zero interest accounts out of the goodness of their hearts.
If that is the case the Fed, FDIC and Yellen have effectively nerfed the interbank market.