FDIC Suggests ‘Targeted’ Coverage Best Option for Deposit Insurance Reform

Posted: May 03 2023

A “targeted” deposit insurance system in which additional coverage would be extended to business payment accounts would be the best option for balancing financial stability and depositor protection relative to its costs, the FDIC said in its long-awaited review of the system. The review, prompted by recent bank failures, considered three options for reforming the Deposit Insurance Fund: The limited coverage option that exists now, an unlimited option that would cover all deposits, and a targeted system with additional coverage for business payment accounts. The FDIC said the latter was the most promising option but acknowledged there are “significant, unresolved practical challenges” to implementing it. Any modification to the coverage level must be approved by Congress.

The FDIC report did not weigh in on a possible special assessment fee to make up for the hit to the DIF resulting from the agency’s systemic risk exemption declaration for Silicon Valley Bank and Signature Bank. The agency plans to issue that decision at a later date. Instead, the report offered a history of the fund along with possible changes lawmakers could pursue.

The FDIC’s report presented options that all come with tradeoffs, including potentially increased regulation. An unlimited system in which all deposits are covered would mostly eliminate bank runs, but would also eliminate depositor discipline while generating possible broader market disruptions and increased insurance assessments, FDIC said. The targeted option could achieve financial stability with only a limited decrease in depositor discipline, but it would be challenging to define business accounts and would also require additional DIF funding.

“The extent to which the DIF would need to expand would be a function of both how business payment accounts are defined and the extent to which the demand for business payment accounts results in inflows from other asset markets,” the agency said. “Although assessments would likely need to increase, it is difficult to estimate to what extent.”

To read more, visit: https://www.fdic.gov/analysis/options-deposit-insurance-reforms/report/options-deposit-insurance-reform-full.pdf