FDIC Proposes Changes to Deposit Insurance to Improve Deposit Stability

This commentary reviews the three options of deposit insurance proposed by the FDIC to improve financial stability in the banking sector.

Key highlights include:

• On May 1, 2023, the FDIC released an analysis of agency's mandate with a discussion of potential changes to its policies to address current risks to deposit stability.

• In our view, all three outlined approaches would be an improvement from the current insurance program, and we see benefits for a targeted insurance scheme modeled after the successful Transaction Account Guarantee Program that was implemented during the 2008 Financial Crisis.

• As deposit protection schemes increase coverage there are consequences as well. Such consequences mainly revolve around moral hazard risk, where banks take on additional risks due to their low concern about funding stability, while depositors have low motivation to be wary of banks' additional risk-taking.

“We agree with the FDIC’s view that targeted coverage in addition to retaining existing small depositor coverage would likely provide the best combination of reduced uninsured deposit flight risk while maintaining the costs for banks at more moderate levels than unlimited insurance, or than raising the deposit coverage limit to a significantly higher level.” said Rebecca Clarke, Vice President - Global FIG.