FDIC Calls for Review of US Bank Deposit Insurance System

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The process is launching fresh debate over whether an expansion of government protections is appropriate.

The Federal Deposit Insurance Corp. (FDIC) has published a comprehensive overview of the federal system this week, sparking debate once again regarding the need – or lack thereof – for additional government protections on bank deposits.

The overview is also taking another look at how much additional coverage might be required.

This review represents the third report the FDIC has published since the collapse of Silicon Valley Bank (SVB) and Signature Bank earlier this year. At that time, regulators chose to backstop all deposits, not just those conventionally covered by the guarantees of the Federal Deposit Insurance Corp. The regulator’s guarantees cover up to $250,000 per person, per bank, but in this instance, they were all covered in an effort to prevent further collapse throughout the banking system.

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The FDIC is now considering policy options to change the nature of the guarantees in response to the calls made by some lawmakers to increase the cap or even eliminate it completely. That strategy is meant to help mitigate outflows from small and regional lenders that were substantial and lasting on the heels of the bank failures in March. With signs of problems at First Republic Bank, which was only just recently seized by regulators and sold to JPMorgan Chase & Co, the debate has reopened.

The report addressed deposit insurance coverage level options and implications of certain strategies.

The report was first announced by Martin Gruenberg, chairperson of the FDIC. It addressed coverage level options, excess coverage, implications of risk-based pricing, and the regulator’s current fund adequacy.

It’s estimated that the regulator’s fund has already suffered $20 billion in damage from the SVB collapse, with an additional $2.5 billion hit from the Signature Bank failure. First Republic’s crumble cost about $13 billion to the fund, said the FDIC ahead of the release of the report.

The deposit insurance from the FDIC helps to uphold the regulator’s bank deposit guarantee to a limit of $250,000 per person per bank. Should a bank fail, the FDIC uses the fund for that coverage to repay customers with accounts up to that limit. The limit was put in place by the 2010 Dodd-Frank reform law that was implemented after the financial crisis of 2008. At that time, it was an increase from its previous cap of $100,000.

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