FDIC proposes changes to deposit insurance system in wake of bank failures

JHVEPhoto

Following three bank failures in the past seven weeks, the Federal Deposit Insurance Corp. released on Monday an overview of the deposit insurance system and suggested three options for reform to address financial stability concerns.

"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," said FDIC Chairman Martin J. Gruenberg in a statement.

As it stands now, the FDIC caps deposit insurance at $250K account, regardless of whether that account is for an individual or a business. In one option, the regulator suggested targeted coverage that would offer different deposit insurance limits across account types; business payment accounts would have significantly higher coverage than other accounts.

It also suggested maintaining the current deposit insurance framework that provides insurance to depositors up to a specified limit, possibly higher than the current $250K limit. Another option would be to extend unlimited deposit insurance coverage to all depositors, it said.

While the proposed options would require Congressional action, some aspects of the report "lie within the scope of the FDIC's rulemaking authority," it said.

"Of the three options outlined in this report, the FDIC believes targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs," the FDIC said.

While the FDIC seized First Republic Bank (NYSE:FRC) over the weekend, the resolution and sale of assets to JPMorgan Chase (NYSE:JPM) protected all deposits, including uninsured ones, and didn't require a systemic risk exception.

More on the FDIC and the Bank Crisis:

• First Republic stock swoon deepens on report FDIC takeover imminent
• White House, Fed & Treasury considering plans to save First Republic
• U.S. said to evaluate expanding emergency lending for banks
• Should the FDIC deposit insurance cap be kept, waived or raised?

Comments

[soral a raison]

Meanwhile, the gas station masquerading as a country, with a debt-to-GDP ratio of 14%, and no inflation, is experiencing no bank failure and has a growing economy (according to IMF). All the while while winning a proxy war against NATO. But the decadent western capitalists go on moralizing the entire planet. lol.

[ransim7222]

@soral a raison
If the Ukraine war is wonderful for Russia, why stop? They must have an endless supply of young Russian men, like their oil, so keep on sending them to die. Why not? It is apparently wonderful for the Russian economy, according to you at least. And I am sure you think it is terrific for Russian demographics.

[Eformula]

Monetize the debt is that what they want?

[Djreef1966]

They’re about to give the banks carte blanche to act any way they want to.

Those who do not learn from history are doomed to repeat it.

[tlapp]

The most regulated industry in America is the one with the most failures. When you back stop failure with taxpayer money you only get more of what you subsidize.

[eshali]

Look, we do not need more regulations but for the bank managers, boards of directors, and the Fed to follow the current rules and regulations and that if they don't, immediate action by the Fed: fines and firings! We should also make companies and individuals who have over 250K in deposits, pay for the overage themselves: taxpayers should not pay them since they did not follow the rules!

[studebakerjf]

@eshali Even without respect to the current rules and regulations, we simply need bank managers and boards of directors to be sensible. When interest rates have been near zero for an extended period of time, they're likely to go up sooner or later. The people who decide where to invest depositors' money need to act accordingly.

[Chancer]

As I understand the First Republic deal it included an agreement for FDIC to "share" (cover) some of JPM's losses. But FDIC insurance is to cover deposits- not absorb losses of acquiring banks. This may be another illegal Biden move without congressional authority.

[No Identity]

I do not want the Fed to Nationalize banks. That surely what it sounds like.

[Finding Your Retirement]

We've had four bank failures within the past seven weeks (five if you count credit suisse). why does everyone keep forgetting silvergate capital? Sometimes it feels like I'm on crazy pills

Or maybe this is the mendela affect and silvergate never existed

[Illuminati Investments]

Just raise the limit along with inflation and it'll be millions in no time.

[A Serious Man]

Maybe they should worry about the debt ceiling instead and what will happen if even a whiff of treasury defaults starts to float around. Or are they going to think about that only when that happens ? Kinda like nobody thought about what would happen with banks' balance sheets when the interest rates exploded almost overnight.

[ransim7222]

@A Serious Man
Absolutely, time for a balanced budget amendment!

[TommyIrish]

The “bad news”, Congressional action required in order to change rules.

The “good news”, the “FDIC” always bails out “ everyone” they feel like no matter what the rules say.

In the US the rule of law ceased a VERY long time ago, largely on account of people’s representatives wishing to abscond from any responsibility, and conveniently replaced with the rule of unelected Government officials.

These “changes” are all nonsense.

Congress is unable to pass anything on this for as far as the eye can see…

[rubble]

@TommyIrish You're right. In the previous article Janet Yellen called the "Trillion Dollar Coin" a gimmick. Well, without rule of law- what isn't a gimmick?

[cons123]

Insurance coverage for all would only make all the crooks apply for bank jobs. Fix the BOD's, top management qualifications, consequences for failure, framework for assets vs, liabilities, timeframes, allocation and diversification, auditors, tightened the regulations for becoming a federal bank and the BOD and Top executive fiduciary responsibilities to the stakeholders.

[jerseyvalueinvestor]

Im thankful to see that the powers that be now see the true issue at play, none of this would have ever occurred had all deposits be insured. now im not saying that is the best option, but it is a statement based in reality.

[jvictor777]

"While the proposed options would require Congressional action..." Huh? They already decided to back all depositors, specifically those above the supposed $250k threshold, without Congressional action.

[ransim7222]

@jvictor777
That was typical Biden administration senility in action, with one of his Executive Orders. It will undoubtedly be challenged.
www.natlawreview.com/...

[Sally Miller]

Raising the level of insurance only encourages the banks to take ever greater risk with their deposits. And when they fail, the burden is dumped onto the taxpayer (aka Inflation victim) who has no hand in the game, just serve as the backstop for wealthy people who are too lazy to keep an eye on where their money is sitting.

Regulators are supposed to monitor these banks and hold them accountable. Clearly the regulators, including FDIC are at fault here, and want to shine the spotlight elsewhere in an effort to shift the blame and make it look like a systemic problem when it's actually regulator failure. But what else would you expect from an institution easily compromised employees?

[Pablo Linguist]

@Sally Miller let’s examine first republic as a case study…

Shareholders were wiped out, managers will have their bonuses clawed back from the last several years and no taxpayer funds were used. It sounds like there was plenty of accountability in the current system. The innocent people are the depositors, they shouldn’t bear the risk of doing a deep sophisticated analysis every time they open a checking account…

[Z Hu]

@Sally Miller I believe the root cause for these bank runs, are that the assets which were marked Hold To Maturity, were very low yielding treasures, whereas savings account depositors demanded the current market rate interest yield. It's a yield problem, that wouldn't have happened if Fed's rates were to rise slowly.
Given enough time, banks would be able to adjust the ratio of HTM assets.

[MoneyPig]

Stupid. Americans are LOSERS. Read any annual report, it is one job of the CFO--one of those high paid geniuses in fancy suits--to monitor the credit worthiness of the the banks the company uses. The CFO certifies he has done this work to every shareholder in virtually every annual report.

"Hi, I am an American and I am stupid." Why I don't like smiling Joe Biden. He is a symbol for failure, an old stinking man covered in rotting flesh and with a mouth full of fake teeth making smart remarks.

Every CFO and CEO amdnthe entire board of every company that lost money at these banks desire to have their poorly managed businesses cease to operate. It's called capitalism. Go to China, losers, and see what capitalism can do.

Don't go on a US Navy vessel. They only run half the time. Thankfully, the Philippines agreed to defend the US Military as they run away.

[Pablo Linguist]

@MoneyPig you are so very edgy

[shucmu]

Does anybody know when congress will convene to work on this reform? Really Appreciated

[shucmu]

Does anybody know when congress with convene to work on this reform? Really Appreciated

[jpau]

Here's a thought. Any deposits held by a bank that exceed the $250k limit may only be invested in short term treasuries.

[tboucher1]

@jpau

How will the bank make loans?

[RobertBLSH]

@jpau given that 43% of all deposits are uninsured (>250k), that could lead to some severe shocks to the lending market if implemented.

[Pablo Linguist]

@jpau it’s a start, but the regulators will just make the tier 1 capital requirements higher and then banks return on equity will drop and banks will become like utilities. Low growth bond like boring places to park money…it’s coming

[Waco Bill]

Question: Are the current rules 250K per bank or per account? If I had 3 accounts at a bank, would I be insured up to 750K (250 per account) or just a total of 250K?

[A Serious Man]

@Waco Bill Per bank.

[tboucher1]

@A Serious Man

Just to elaborate - per bank, per depositor, per ownership category.

[kmi]

@Waco Bill

per "type" of account and if you have one checking solo and one joint both would be insured.

You could have significant money in one bank and have it all be insured if you do it right.