FDIC Supports Higher Deposit Insurance Guarantees for Business Accounts

The Federal Deposit Insurance Corp. (FDIC) favors “targeted coverage” among the options for deposit insurance reform.

In that option, different deposit insurance limits would be offered across account types, with business payment accounts receiving “significantly higher” coverage than other accounts, the FDIC said in a Monday (May 1) press release announcing its release of a report on options for reform after the recent bank failures.

“Of the three options outlined in this report, the FDIC believes targeted coverage best meets the objectives of deposit insurance of financial stability and depositor protection relative to its costs,” the FDIC said in the release.

The other two options for deposit insurance reform identified in the report include “limited coverage,” in which the current framework that provides insurance up to a specified limit would be maintained, and “unlimited coverage,” in which unlimited deposit insurance coverage would be extended to all depositors, according to the release.

In the case of the limit coverage option, the specified limit could be raised above the current $250,000, but the essential framework would remain in place, the release said.

In a statement released in conjunction with the report, FDIC Chairman Martin J. Gruenberg detailed the FDIC’s reasons for favoring the targeted coverage option.

“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,” Gruenberg said. “In addition, business payment 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.”

Each of the three options would require congressional action, although some issues would be subject to reform that is within the scope of the FDIC’s rulemaking authority, according to the press release.

The production of the report, “Options for Deposit Insurance Reform,” was directed by Gruenberg after the recent bank failures, the release said.

“The recent failures of Silicon Valley Bank and Signature Bank, and the decision to approve Systemic Risk Exceptions to protect the uninsured depositors at those institutions, raised fundamental questions about the role of deposit insurance in the United States banking system,” Gruenberg said in the release.

As PYMNTS reported March 29, the FDIC became front-page news as debate raged over what went wrong at Silicon Valley Bank and Signature Bank, how much it will all cost and how much deposit insurance protection bank customers need.