May 2, 2023

FDIC Proposes Deposit Insurance Reform

Over the past few months, there have been several bank failures which underscore the challenging economic conditions currently faced. While the collapse of Silvergate Capital, Silicon Valley Bank, and Signature Bank were triggered by different conditions, the result was the same for each. The federal government was forced to step in, manage the sale of remaining assets, and provide assurance to accountholders no money would be lost as a result of the failure.  Unfortunately, the scenario repeated itself again on May 1^st, when First Republic Bank was seized and sold to JP Morgan Chase. A recurring theme in these failures was the large number of uninsured deposits and short-term demandable liabilities held by each institution. In the end, it was an uninsured depositor run that caused two of these failures.

Many Atlanta families and companies have become increasingly concerned about the existing situation.To bolster confidence in the banking system and to assuage account holder concerns, the Federal Deposit Insurance Company (FDIC) has proposed an increase in the deposit insurance amount. A report issued earlier this month, Options for Insurance Deposit Reform, outlines three potential reforms to boost confidence. Included are important details about three programs which include Limited Coverage, Unlimited Coverage, and Targeted Coverage. Each varies on the type of eligible accounts and insurance coverage offered. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Proposed Reform Programs

• Limited Coverage – This option maintains the existing framework that insures all depositors up to a specified limit determined by account ownership rights. A potential increase in the amount of coverage (for all accountholders), which is currently set at $250,000 for most accounts, could be increased to $500,000 or higher depending on various circumstances. Since this has been the main insurance model in operation for years it is the best tested option available. It has been proven to minimize transition costs while protecting against broad market disruption. Despite this, the cost associated with an increase can be significant and there is concern this change alone is not sufficient to provide adequate protections.
• Unlimited Coverage – This option would extend unlimited coverage to all accountholders. The option would directly address financial stability concerns and have the most dramatic impact on depositor discipline and make it easier to manage the deposit insurance determination and resolution process. A key concern about this approach is that it could open the door to extremely risky behavior as depositors would have no incentive to evaluate bank risk policies or investment practices. Since the funds are insured there would be little reason to take the evaluative steps common in today’s banking landscape.
• Targeted Coverage – This option would call for the introduction of different insurance coverage across different account types. Under this approach, certain account types could receive unlimited coverage while others might receive limited coverage. The report specifically identifies business accounts as those ideal for the highest coverage limits due to how funds are traditionally used. Businesses rely on these accounts to fund payroll, pay vendors, and other essential economic activities. If these accounts were to become inaccessible the impact would be more consequential than other account types.

Contact Us

It is clear from the report that the FDIC believes targeted coverage would be the best option to provide confidence, program flexibility, and cost management. Although the FDIC can make some changes independently, Congressional approval is required to move to one of these proposed coverage models.. If you have a question about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call 770-476-1004 or click here to contact us. We look forward to speaking with you soon.