FDIC report eyes deposit insurance reform options, setting higher business payment account coverage among them

A report presenting options for deposit insurance reform – with targeted coverage that sets “significantly higher” coverage for business payment accounts described as possibly the most promising with respect to stability – was unveiled Monday by the Federal Deposit Insurance Corp. (FDIC).

The FDIC embarked on its analysis in the wake of the failures of Silicon Valley Bank and Signature Bank, where regulators deployed a “systemic risk exception” that resulted in all deposits in both banks – insured as well as uninsured – being made whole.

FDIC Chairman Martin Gruenberg, in a statement Monday, said the two bank failures and use of the exception “raised fundamental questions about the role of deposit insurance in the United States banking system.” Gruenberg said he believes the analysis will serve as “a useful starting point for consideration of the issues surrounding deposit insurance and allow for an informed public discussion.”

The agency said that as part of its analysis, it 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.
  • Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts.

The FDIC said that of the three options, it believes targeted coverage “best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs.” It said the proposed options would require congressional action but that some aspects of the report are within the agency’s rulemaking authority.

Gruenberg, in his statement, noted the report highlights that while the overwhelming majority of deposit accounts remain below the deposit insurance limit, growth in uninsured deposits has increased the exposure of the banking system to bank runs.

“At its peak in 2021, uninsured deposits accounted for nearly 47% of domestic deposits, higher than at any time since 1949,” he said. “Uninsured deposits are held in a small share of accounts but can be a large proportion of banks’ funding, particularly among the largest banks by asset size. Large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability.”

Targeted coverage is seen as the “most promising” option to improve stability relative to its impacts on bank risk-taking, bank funding, and broader markets, but Gruenberg also pointed to “significant unresolved practical challenges,” including defining accounts for additional coverage and preventing depositors and banks from circumventing differences in coverage.

Other options that should be considered, the report states, include:

  • excess deposit insurance (alongside changes to deposit insurance limits), possibly provided at the bank or depositor level, and may be provided by the private sector, by the FDIC, or by a combination;
  • requiring secured deposits for large uninsured deposits:
  • limiting convertibility of deposits above the deposit insurance limit.

“This report argues that Limited Coverage and Targeted Coverage may also benefit from simplification of the deposit insurance system but are unlikely to benefit from a voluntary excess deposit insurance system,” it states. “The options and tools in this report may inform policies that can help the deposit insurance system best meet its objectives in the context of the current challenges.”