2021, the proportion of uninsured deposits in the banking system was 46.6%, higher than at any time since 1949, and amounts to approximately $8 trillion across all chartered institutions. As of December 2022, more than 99% of the number of deposit accounts were under the $250,000 deposit insurance limit. So, it is clear that a small number of accounts hold a very large share of uninsured deposits. While deposit insurance reform is well-intentioned, it cannot be done by the FDIC. Changes would require congressional action. For the record, I am against changing the current set-up, except for discussing whether $250,000 is the appropriate limit. Here is my reasoning: • Having a limit brings an element of market discipline. Uninsured depositors are often more sophisticated and able to ascertain the safety and soundness of the financial institution to which they are making deposits. Smaller account holders do not typically have this ability. • Without a deposit insurance limit, the moral hazard of increased risk-taking will occur. Moral hazard is the incentive to take on greater risk as a result of being protected from the consequences of risktaking. If uninsured deposits were to suddenly become insured, banks could advertise high-interest rates to attract deposits and use those deposits to fund their loan and investment portfolios and be incented to make riskier choices to enhance the bank’s profitability. The end result could be a bank failure, requiring the FDIC to bail out the depositors, contrary to the reason for having a deposit insurance limit in the first place. • The proper function of a free-market banking economy is to allow well-managed banks to succeed and underperforming banks to exit the industry. This is accomplished in the ordinary course of acquisitions and mergers and provides a safe and orderly redistribution of capital from underperforming to outperforming managers. Without this activity, the banking system could contain many underperforming banks leading to an unstable industry. • The largest banks in the U.S. are sometimes deemed to be the safest. Yet they are the banks that often have the largest amount of uninsured deposits. To create a concentration of deposits of this magnitude in a few institutions creates a systemic risk to the banking system. • Regulation and supervision are essential to safeguarding the DIF and the banking system. Enforcing capital and liquidity requirements are a part of the regulatory oversight to ensure a safe and sound banking system when prompt corrective action is needed to protect the DIF. n Anne Benigsen President SOCIAL ENGINEERING NETWORK MONITORING BY COMMUNITY BANKERS FOR COMMUNITY BANKS www.acivitas.com VULNERABILITY SCANS PENETRATION TESTING Chris Tuzeneu VP – Information Security INDEPENDENT REPORT | 33
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