FDIC leader keeps focus on ‘targeted coverage’ for deposits in response to bank failures

“Targeted coverage” for federal insurance of bank deposits remains at the top of the list of proposed changes to deposit insurance in the wake of three, large regional bank failures last spring, the leader of the federal bank deposit insurance agency indicated Thursday.

Speaking at the 22nd annual Bank Research Conference in Washington sponsored by the Federal Deposit Insurance Corp. (FDIC), agency board Chairman Martin Gruenberg urged conference participants (largely made up of economists and financial researchers) to read the report issued by the FDIC May 1, “Options for Deposit Insurance Reform.” That report, issued within a six-week time frame following the failure of the first two of banks (in March, and issued on the day of the failure of the third) recommended three options to reform the deposit insurance system.

Gruenberg noted that the third option – “targeted coverage” – was identified as having the greatest “potential for meeting the fundamental objectives of deposit insurance relative to its costs.” (The FDIC Board chairman made similar remarks in a speech earlier in the day before the International Association of Deposit Insurers.)

Targeted coverage would allow for different levels of insurance coverage across different types of accounts, and focusing on higher coverage for business payment accounts. The other two types of coverage identified in the report are limited deposit insurance coverage (which maintains the current structure of deposit insurance in which there is a finite deposit insurance limit and possibly higher than the current $250,000 limit by ownership rights and capacities); and unlimited deposit insurance coverage, which extends unlimited deposit insurance to all depositors.

Gruenberg told the conference that insuring business payment accounts through targeted coverage may pose a lower risk of moral hazard because those account holders are less likely to view their deposits using a risk-return tradeoff than a depositor using the account for savings and investment purposes.

On the other hand, he said, business payment accounts may pose greater financial stability concerns than other accounts “given that the inability to access these accounts can result in broader economic effects from the failure to make payrolls that might be mitigated by higher deposit insurance coverage.”

“The report points out that providing a practical definition and ensuring that banks and depositors cannot circumvent those definitions to obtain higher coverage are important for the effective implementation of targeted coverage,” he said.

The FDIC Board chairman said altering deposit insurance coverage is one of “many open questions to address.”

Remarks by FDIC Chairman Martin J. Gruenberg to the 22nd Annual Bank Research Conference Sponsored by the FDIC’s Center for Financial Research