IS DEPOSIT INSURANCE REFORM NECESSARY? By Tom Chesney President, Commercial Banking Division, AMG National Trust Bank, ICBC Member A few recent bank failures and a few more distressed regional banks have turned attention to deposit insurance reform. In the case of Silicon Valley Bank, Signature Bank and First Republic, the Federal Deposit Insurance Corporation (FDIC) stepped up to prevent contagion in the banking sector by insuring all deposits at these institutions, even if they exceeded the current limit of $250,000 per depositor. The FDIC recently released a report, “Options for Deposit Insurance Reform,” to address the role of deposit insurance in facilitating financial stability and discouraging bank runs. Three options were listed: 1. Limited Coverage: This is what is in place now, and whether the current limit of $250,000 per depositor is sufficient is open to debate. 2. Unlimited Coverage: This option would insure all deposits at financial institutions covered by FDIC insurance. Credit Union deposits are insured by the National Credit Union Administration, NCUA, a separate government agency. Their coverage pretty much mirrors the FDIC coverage. 3. Targeted Coverage: Offering different deposit insurance limits across account types with a suggested focus on business payment accounts that would receive significantly higher coverage than other accounts. For context, the Deposit Insurance Fund (DIF) is funded and paid for by assessments on each bank, not by taxpayers. The FDIC was established in 1933 after the great depression of 1929 to establish depositor confidence, keep pace with inflation, and help smaller institutions. The initial coverage was $2,500, and the limit has been raised seven times to its current $250,000 threshold that was set in 2008. The target for the DIF balance is 1.35% of insured deposits. The trend in uninsured deposits has increased the potential of the banking system to bank runs, wherein a class of depositors is fearful of whether their deposits are safe, and if they deem them to be unsafe, they withdraw them to hold them in cash or for deposit in different, safer banks. At its peak in 32 | INDEPENDENT REPORT
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