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US regulator eyes deposit insurance reform

By Charbel Kadib
4 minute read

A regulatory review has proposed a revamp of the deposit insurance system following a spate of banking failures in the United States.  

The Federal Deposit Insurance Corporation (FDIC) has released the findings of a review of the deposit insurance system in the United States.

In its Options for Deposit Insurance Reform report, published on Monday (1 May), the FDIC tabled recommendations aimed at bolstering financial stability following recent banking collapses.  

“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 J 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 review explored three key options for 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.
After considering these options, the FDIC has backed a “targeted coverage” model, which it claimed, “meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs”.

“Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects,” Mr Gruenberg added.

“In addition, business payment accounts may pose a lower risk of moral hazard because those account holders are less likely to view their deposits using a risk-return trade-off than a depositor using the account for savings and investment purposes.”

Mr Gruenberg stressed the need for a “practical definition” of the proposed model, which ensures banks and depositors “cannot circumvent those definitions to obtain higher coverage”.

“I believe this report will serve as a useful starting point for consideration of the issues surrounding deposit insurance and allow for an informed public discussion,” he said.

Key changes to the deposit insurance system would need to be legislated by the US Congress.

The publication of the FDIC’s report coincided with its announcement of the closure of First Republic Bank — the latest US regional banking institution to fold under the pressure of waning customer and investor confidence. 

To protect depositors, the FDIC has accepted a takeover offer by US banking giant JPMorgan Chase following a “highly competitive bidding process”. 

As part of the deal, JP Morgan is set to assume full ownership of First Republic’s deposits, assets, and bank branches (84 branches located in eight US states).  

This includes:

  • approximately US$173 billion (AU$260.5 billion) of loans;
  • approximately US$30 billion (AU$45 billion) of securities;
  • approximately US$92 billion (AU$138.5 billion) of deposits, including US$30 billion (AU$45 billion) of large bank deposits, which will be repaid post-close or eliminated in consolidation. 
The FDIC has stressed customers are not required to change their banking relationship in order to retain their deposit insurance coverage (totalling an estimated US$13 billion) up to applicable limits.  

The collapse of First Republic follows an aggressive investor sell-off of the bank’s shares in response to the release of its financial results over the first quarter of the 2023 calendar year, resulting in a 78 per cent plunge in its share price. 

US regulator eyes deposit insurance reform

A regulatory review has proposed a revamp of the deposit insurance system following a spate of banking failures in the United States.  

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