Following the recent bank failures, the Federal Deposit Insurance Corporation (FDIC) released an overview of the deposit insurance system and options for reform.
The report, called Options for Deposit Insurance Reform, examines the role of deposit insurance in promoting financial stability and preventing bank runs. It also looks at policies and tools that may complement changes to deposit insurance coverage.
“The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system,” FDIC Chairman Martin Gruenberg said. “This report is an effort to place these recent developments in the context of the history, evolution, and purpose of deposit insurance since the FDIC was created in 1933.”
The FDIC outlines three options for deposit insurance reform:
• Limited Coverage: Maintaining the current deposit insurance framework, which provides insurance to depositors up to a specified limit (possibly higher than the current $250,000 limit) by ownership rights and capacities;
• Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors; and
• Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts.
Of the three options, the FDIC contends that targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs. The report notes that the proposed options would require Congressional action, though some aspects of the report lie within the scope of the FDIC’s rulemaking authority.
U.S. Rep. Patrick McHenry (R-NC), chair of the House Financial Services Committee, urged caution in expanding federally-backed deposit insurance.
“As we evaluate proposals about deposit insurance, it’s critical that policymakers be thoughtful and deliberate,” McHenry said. “As the FDIC’s own report notes, expanding deposit insurance includes tradeoffs, including costs imposed on customers and significant moral hazard risks. It’s concerning that the FDIC is immediately jumping to the conclusion that a public sector solution is the only viable option rather than considering private sector options that address the specific needs of large companies. The House Financial Services Committee will continue to evaluate all options to ensure Americans’ confidence in the safety and soundness of our banking system.”