WASHINGTON — The Federal Deposit Insurance Corp. issued its report today on viable paths forward for deposit insurance in the wake of a string of midsize bank failures in March, and only hours after First Republic Bank was sold to JPMorgan Chase by the agency.
In its report, the agency said there are three deposit insurance reform scenarios that it examined: maintaining the status quo, unlimited deposit insurance and targeted insurance. The agency asserted they are considering each option carefully, but showed a preference for targeted insurance, citing drawbacks to the alternatives.
FDIC officials say maintaining the current system of deposit insurance will not adequately address run risk, and that unlimited deposit insurance introduces too much moral hazard into the economy because it would make banks less careful in their management practices.
FDIC said the third reform — targeting deposit insurance for business accounts — could provide greater coverage to business accounts without the moral hazard unlimited insurance introduces, yielding substantial financial stability benefits relative to their cost.
"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," FDIC Chairman Martin Gruenberg said in a statement accompanying the report. "In addition, business payments accounts 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."
The agency also made clear that each of the proposed options should be viewed alongside other policy changes, and said their effectiveness depends on the extent to which other policies are pursued simultaneously. They said any changes to deposit insurance levels would require congressional approval. However, even without new statutory authority, they say, they have limited tools that may work toward financial stability objectives and mitigate consequences in the interim.
"Existing and new tools can complement deposit insurance reform to maximize its effectiveness," the report said. "Bank safety-and-soundness regulation and supervision can, in principle, constrain bank risk-taking and reduce the likelihood of uninsured depositor runs.
"Deposit insurance pricing promotes fund adequacy and the fair allocation of the cost of deposit insurance across banks; to some extent, it also influences bank risk-taking," the report continued. "Requiring collateralization of large, uninsured depositors may reduce run incentives and promote monitoring. Limiting the convertibility of large, uninsured deposits may also reduce bank runs. Each tool has strengths and weaknesses."
The agency says one of its greatest challenges would be clearly defining who gets what level of protection — in other words, differentiating between businesses and individuals may be easier said than done.
"Such accounts may be measurable by first distinguishing the identifier associated with the account: for example, using a tax identification number or employer identification number rather than a social security number," the report stated. "In addition, business payment accounts may be distinguished from other accounts using account features. For example, business payment accounts may be defined as those that are demandable and do not pay interest (or do not pay interest above some benchmark). In addition to creating a practical definition to identify business payment accounts, delineating between accounts eligible to receive higher coverage is a major challenge."
