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FDIC Recommends Expanding Its Authority in Order to Prevent Bank Runs

S.J. Steinhardt
Published Date:
May 2, 2023

In light of recent bank failures, the Federal Deposit Insurance Corporation (FDIC) issued a report recommending an expansion of its regulatory authority as a means of preventing bank runs.

The report outlined three options for deposit insurance reform:

1. 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.

2. Unlimited Coverage: Extending unlimited deposit insurance coverage to all depositors.

3. Targeted Coverage: Offering different deposit insurance limits across account types, where business payment accounts receive significantly higher coverage than other accounts.

The FDIC recommended the third option in its statement, stating that “targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs.”

Lawmakers in both parties have since discussed potentially raising the deposit-insurance limit from the current $250,000 per depositor, a change that Treasury Secretary Janet Yellen has said may eventually be worth considering, The Wall Street Journal reported.

The FDIC estimates that, as of the end of last year, banks held $7.7 trillion of uninsured deposits, about 43 percent of total deposits in the United States, The New York Times reported.

The report came a day after the agency seized First Republic Bank and sold it to JPMorgan Chase.

“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 in a statement. “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.”

Gruenberg ordered the analysis of the current deposit insurance framework and identify reform options for consideration, as well as additional tools that can be used to maximize the efficiency of the system, following the two banks’ failures.

Last week, the FDIC issued the results of a review of its supervision of Signature Bank, in which it admitted that “[i]n retrospect, FDIC could have escalated supervisory actions sooner, consistent with the Division of Risk Management Supervision’s (RMS) forward-looking supervision concept. Additionally, examination work products could have been timelier and communication with SBNY’s board and management could have been more effective.”

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