Section 6: Options for Increased Deposit Insurance Coverage

This section presents several options for alternative deposit insurance schemes. The options differ in
how much they deviate from the statutory status quo and in their likely effects upon deposit
insurance objectives. Of the options considered, the report suggests that Targeted Coverage, which
allows for higher or unlimited deposit insurance limits for business payment accounts, has the
greatest potential to meet many of the objectives of the deposit insurance system while mitigating
many of the undesirable consequences of raising the limit more broadly.

Limited Coverage maintains the existing deposit insurance framework that insures all depositors up to
a limit by ownership rights and capacities at the current limit or a higher limit. Given its long history,
Limited Coverage is the best tested model of deposit insurance. However, Limited Coverage does little
to address the financial stability concerns associated with the events of March 2023 and the broader
trends in the banking system.

Unlimited Coverage provides unlimited deposit insurance for all deposits. Although Unlimited
Coverage likely provides the greatest financial stability benefits of the options considered, it is also a
significant departure from the existing system. In addition to its possible effects on bank risk-taking,
Unlimited Coverage may cause significant disruptions to other asset markets and would require a
substantial increase in assessments on the industry to support the adequacy of the DIF.

Targeted Coverage considers different coverage across account types, with a focus on providing
significantly higher or unlimited coverage to business payment accounts. Because losses on
uninsured deposits associated with business payments are most likely to create spillovers, providing
higher coverage on these deposits increases financial stability without expanding the safety net more
broadly. Relative to investment accounts, business payment accounts are less likely to seek yield and
are more difficult to diversify across banks in the current system to obtain full deposit insurance. The
major limitations to Targeted Coverage are identifying business payment accounts subject to a higher
deposit insurance limit and restricting the ability of depositors to exploit coverage differentials.
Although more analysis is warranted, Targeted Coverage provides significantly greater financial
stability benefits than Limited Coverage while attenuating many of the drawbacks associated with
Unlimited Coverage.

This section also explores additional options that may be considered alongside Limited Coverage and
Targeted Coverage in which some depositors remain uninsured. The section reviews voluntary excess
deposit insurance, in which individual banks or depositors may choose to insure above the deposit
insurance limit. If large concentrations of uninsured deposits remain under Limited Coverage or
Targeted Coverage, additional approaches could include requiring collateralization of large,
uninsured deposits or limiting their convertibility.

Limited Coverage
An option for deposit insurance reform is to maintain the current deposit insurance framework that
provides insurance to depositors up to a specified limit by ownership rights and capacities as
discussed in Section 3. Although retaining the status quo deposit insurance coverage limits, increasing

49
limits but maintaining them at finite levels, or simplifying the deposit insurance system while
maintaining limited coverage are technically different deposit insurance structures, many of the
fundamental effects of such proposals on the objectives and consequences of deposit insurance are
similar. A change to the deposit insurance coverage limit could be of any magnitude—to $500,000, $1
million, $2.5 million, or $10 million, for example. 126 While the benefits and costs of raising the limit
vary, the variation is differences in degree not kind. This report does not consider any precise, finite
coverage limit and evaluates as one any reform options that maintain the existing deposit insurance
framework in which nontrivial amounts of all deposit products are explicitly uninsured.

The existing limited coverage deposit insurance framework is the best tested model of deposit
insurance. It has been used in the United States since the founding of the FDIC and is in place in many
other countries as well. Maintaining this framework minimizes transition costs and potential broader
market disruptions associated with larger departures from the status quo.

The costs associated with a deposit insurance determination associated with Limited Coverage are
the same as those in the current system, which can be significant, and relate to financial stability.
Consequently, in an option with limited, but an increased, deposit insurance coverage limit,
simplification merits consideration. The FDI Act provides depositors with separate deposit insurance
coverage at each chartered institution where they hold deposits. The deposit insurance coverage limit
is applied to deposit amounts aggregated by different ownership rights and capacities (known as
ownership categories) at the same institution.127 Simplification can also complement the Targeted
Coverage option, which is discussed below.

As of May 2023, there are 14 ownership categories that are covered separately by deposit insurance up
to the standard maximum deposit insurance amount of $250,000 per institution.128 Multiple ownership

126
Expressed as a percentage of per capita GDP, U.S. deposit insurance coverage is the most comprehensive of
any G7 peer and amongst the highest of the G20 countries. Current U.S. deposit insurance coverage also exceeds
substantially both the current median IADI member coverage and IADI historical average. Using information
from the IADI Annual Deposit Insurance Survey of 2022 on coverage levels and the IMF World Economic Outlook,
October 2022, for GDP, the average coverage limit of members of the Financial Stability Board is $75,367 and the
average coverage to per capita GDP is 193.5 percent. In the United States, the current coverage level of $250,000
is 328 percent of U.S. per capita GDP. This is the sixth largest number of all of the countries who are part of the
Financial Stability Board, and the largest of all of the G7 countries. https://www.iadi.org/en/research/data-
warehouse/deposit-insurance-surveys/
127
See 12 U.S.C. § 1821(a)(1)(C). In determining the net amount due to a depositor, the FDIC is required to
aggregate all deposits in the insured depository institution which are maintained by a depositor “in the same
capacity and the same right”. In other words, all deposits that an accountholder has in the same ownership
category at the same bank are added together and insured up to the standard insurance amount. The United
States is one of the few international jurisdictions that provide deposit insurance on a per ownership category,
rather than per depositor, basis. Depending on the organization of the depositor’s accounts, this results in a
higher deposit insurance coverage level per depositor than the coverage limit would indicate.
128
The categories are: single accounts, certain retirement accounts, joint accounts, revocable trust accounts,
irrevocable trust accounts, employee benefit plan accounts, corporation/partnership/unincorporated
association accounts, government accounts, mortgage servicing accounts, public bond accounts, irrevocable
trusts accounts with banks as trustee, annuity contract accounts, custodian accounts for Native Americans, and
accounts of a bank pursuant to the bank deposit financial assistance program of the Department of Energy. For

50
categories complicate the resolution process, potentially delay payments to insured depositors, and
add uncertainty to the FDIC’s ability to provide liquidity to uninsured depositors through an advance
dividend. Reducing the number of categories or limiting deposit insurance to a unique depositor
identifier (such as a social security number or tax identification number) would reduce some of the
challenges of resolution. However, a reduction or elimination in the number of deposit insurance
categories reduces the effective deposit insurance limit available to a depositor with accounts in
multiple categories.
Simplification may also contribute to depositor protection by reducing barriers to understanding
deposit insurance coverage and by reducing asymmetries across depositors based upon their
financial, legal, and regulatory knowledge. Clarity on deposit insurance coverage can then help
depositors make informed decisions about their deposit choices. Clearer information may further
financial stability, as uncertainty about insurance coverage in the event of a bank run is likely to lead
depositors to withdraw their funds, even when their accounts may be fully covered.

Financial Stability

As the events of March 2023 revealed, financial stability under the current deposit insurance
framework can be improved. Bank runs at Silicon Valley Bank and Signature were reminiscent of runs
that occurred before the FDIC’s creation. Further, market perceptions of protection of uninsured
depositors may have changed following the invocation of the systemic risk exception in March 2023
amid concerns about the potential for bank runs at multiple regional banks. Uncertainty associated
with protection of uninsured depositors reduces the transparency and consistency of the deposit
insurance system.

Incentives to run are created by the potential loss incurred by depositors. Although increases in the
deposit insurance limit reduce run risk from depositors covered by the increase, run risk can be driven
primarily by a small fraction of depositors who hold large concentrations of deposits.129 Even if
deposit insurance limits increase, run risk to banks holding the largest deposits persists.
The financial stability benefits of the Limited Coverage option are strongly related to the amount of
the increase in the deposit insurance limit. Even with a ten-fold increase in deposit insurance, there
are likely to remain large uninsured deposits that can pose financial stability concerns. Thus,
additional tools should be considered to further promote financial stability. For example, large,
partially covered accounts may need to be subject to other restrictions such as collateralization, limits

the most common insurance categories, see FDIC, “Your Insured Deposit”
https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/. Note that rules for revocable
trusts, irrevocable trusts, and mortgage service accounts will change on April 1, 2024. For information on these
changes, see “Final Rule on Simplification of Deposit Insurance Rules for Trust and Mortgage Servicing
Accounts.” https://www.fdic.gov/news/fact-sheets/final-rule-trust-mortgage-accounts-01-21-22.pdf.
129
In congressional testimony on March 27, 2023, FDIC Chairman Gruenberg noted that the ten largest accounts
held $13.3 billion collectively. https://www.fdic.gov/news/speeches/2023/spmar2723.html
In addition to the size of the largest ten accounts, the average account above the insurance limit at Silicon Valley
Bank as of December 2022 was over $4 million. Thus, the incentive of depositors to run at Silicon Valley Bank
would likely be materially similar whether the deposit insurance limit was $250,000 or even ten times that limit.

51
to liquidity, or a limited draw schedule that curtails the associated run risk (discussed later in this
section).

Because the existing framework of limited deposit insurance coverage is not expected to meaningfully
affect financial stability, it is important that this option is considered alongside other available tools to
improve upon financial stability.

Such tools include reducing the runnable deposits in the banking system and discouraging uninsured
depositors from running even during an impending failure. To discourage the accumulation of
uninsured deposits, regulations that specifically target the ratio of uninsured deposits to bank assets
would directly affect the bank’s willingness or ability to accept run-susceptible uninsured deposits.
Extending to other institutions simplified versions of existing liquidity regulations that apply to large
institutions may also promote financial stability and limit runs. The supervisory framework can also
play an important role in monitoring interest rate risk and subjecting banks to enforcement actions if
they fail to remediate risks associated with unstable funds. Moreover, the deposit insurance pricing
system could be modified to incorporate additional premiums for concentrations of uninsured
deposits, short-term liabilities, or maturity mismatch. More generally, the pricing system could better
incorporate risks, such as interest rate risk, that may be associated with financial stability concerns.
Explicit collateralization requirements, such as those discussed in Secured Deposits later in this
section, could further lower prospective losses for uninsured depositors, decreasing their incentives
to run. In addition, limiting the full withdrawal capacity of large, demandable accounts may be
considered to promote financial stability when considering limited deposit insurance, discussed in
Limited Convertibility later in this section.

Moral Hazard, Market Discipline, and Depositor Discipline

Existing levels of depositor discipline, overall market discipline, and moral hazard are unlikely to be
greatly affected by changes to deposit insurance coverage limits that maintain the existing deposit
insurance framework. This is especially the case for coverage limit changes that raise the rate by less
than several orders of magnitude. For example, an increase in coverage from $250,000 to $2.5 million
would directly affect only depositors with accounts in the affected range. Among previously uninsured
depositors, those who become fully insured with a limit increase are likely to have been those with the
least resources to monitor banks and to affect risk-taking incentives, though uninsured depositors
with multimillion dollar balances may be more influential monitors at smaller institutions. Overall, the
removal of monitoring incentives for depositors whose accounts become fully insured following a
limited coverage change is unlikely to significantly affect other market participants and bank risk-
taking behavior.

Broader Market Effects

The competitive effects of increases in coverage limits within the existing deposit insurance structure
are tied to the degree of increase. A given coverage increase may affect only a small percentage of
consumer accounts, but it may apply to a much larger share of accounts used by businesses. The
effects on competing financial products are likely minimal since there are few compelling alternatives
to transaction accounts for business purposes.

52
Consistency and Transparency

The current deposit insurance framework suffers from perceived consistency and transparency issues.
Deposit insurance coverage reform options that maintain greater amounts of the existing framework
are more likely to perpetuate the existing perceived consistency and transparency issues.

Fund Adequacy

The effects on Fund adequacy would depend upon the extent of changes to the deposit insurance
limit. Limited information on the volume of deposits at alternative thresholds makes it difficult to
determine the extent to which the DIF would need to increase. By number, the vast majority of deposit
accounts are already insured and to the extent that uninsured deposits are heavily concentrated
among the largest depositors, the less increases in the limit would affect the DIF. The anticipated
effects to the DIF, therefore, are likely modest.130

Unlimited Coverage
Extending unlimited deposit insurance coverage to all deposits is a second option for deposit
insurance reform. 131 This option would directly and effectively address financial stability concerns. Of
the options considered, however, unlimited deposit insurance is likely to have the most dramatic
effects on depositor discipline and the most likely to have broader market implications. It would also
have the largest effect on the exposure to and adequacy of the DIF. To limit undesirable
consequences, unlimited deposit insurance would need to be paired with other tools, and the efficacy
of those tools would need to be assessed to ensure that they meet policy objectives.

An additional benefit of Unlimited Coverage is that it eliminates the need for a deposit insurance
determination and simplifies the resolution process. Also, as all deposits are insured, there is no need
to secure deposits or limit their convertibility and no basis for voluntary excess deposit insurance.
Consequently, those options do not apply to Unlimited Coverage.

Financial Stability

While there are various methods to reduce destabilizing bank runs, the most direct way is to remove
the incentives for depositors to run. These incentives are inseparably tied to the degree to which
depositors are subjected to potential loss in the event of a bank failure. The possibility of bank runs
can be almost fully eliminated by expanding deposit insurance to all depositors and deposits. As
discussed in the next section, however, increased moral hazard could increase overall risk in the
system and affect financial stability.

130
For example, FDIC (2000) estimated that a doubling of the deposit insurance limit at the time from $100,000 to
$200,000 would be associated with an increase in insured deposits of $270 billion relative to almost $3 trillion in
insured deposits at that time.
131
Proposals for unlimited deposit insurance are not new. Out of the 150 proposals for deposit insurance made
in Congress between 1886 and 1933, 80 percent called for insurance of all or nearly all deposits (FDIC 1983, pp.
29-30).

53
Moral Hazard, Depositor Discipline, and Market Discipline

Although unlimited deposit insurance would promote financial stability through the decreased
propensity for bank runs, it also has the potential to exacerbate moral hazard problems, as depositors
have no incentive to evaluate bank risk-taking behavior when placing their deposits and minimal
incentive to regularly monitor bank risk-taking behavior.132 Depositor discipline can occur on an
ongoing basis to the extent depositors monitor and influence bank risk-taking. For such depositor
discipline to be effective, depositors must not only have the incentive to exercise discipline, they also
need willingness and expertise to evaluate bank behavior. Depositor discipline can also occur after the
fact in the form of bank runs. Depositor discipline in the form of bank runs has significant financial
stability costs, but it also puts an end to problems at a bank that may have gone unaddressed.
Unlimited deposit insurance coverage would for practical purposes put an end to both types of
depositor discipline.

Although unlimited deposit insurance removes depositor discipline, it need not reduce overall market
discipline on a bank from non-deposit creditors, such as debt holders and stockholders. It is even
possible that non-deposit creditors would perceive themselves to be at increased risk of loss under a
system of unlimited deposit insurance coverage and have greater incentives to exercise discipline.
This is because the coverage of all depositors, and the operational ease of doing so, may make it
unlikely that a systemic risk determination would be warranted.

Another consideration is that unlimited deposit insurance would likely increase banks’ incentive to
fund themselves largely with deposits and less with uninsured funding sources whose claimants have
incentives to monitor risk. On balance, an explicit full deposit insurance guarantee of all deposits
would greatly increase banks’ ability to access and rely on federally guaranteed funding. With bank
runs effectively eliminated, the burden on other parts of the system of controlling large buildups of
bank risk would increase. Any underperformance of supervision, regulation, deposit insurance pricing,
or other risk control mechanism such as discussed in Section 5 would likely have greater cost to the
DIF under a system of unlimited deposit insurance.

Existing tools can support Unlimited Coverage by mitigating the associated moral hazard concerns.
For example, increasing capital requirements or expanding long-term unsecured debt requirements
may provide meaningful constraints to moral hazard in the absence of depositor discipline with
unlimited insurance. In addition, moral hazard concerns under Unlimited Coverage may be addressed

132
Unlimited deposit insurance will not eliminate bank failures, and depositors still may suffer inconvenience
costs associated with failure. These costs may be a reason why insured depositors sometimes run from a bank
approaching failure (Davenport and McDill, 2006). A large component of inconvenience costs is likely the
possibility of restricted access to deposited funds in the event of failure. Without the need to complete an
insurance determination and with an adequately capitalized deposit insurance fund (or a credible commitment
from the Treasury to ensure the FDIC can meet all financial obligations), depositors should not experience
restricted access to their funds. Since unlimited deposit insurance does not eliminate bank failures entirely,
there will still be some inconvenience costs associated with depositors needing to find a new bank on a timeline
that is outside of their control during a failure. (These costs are borne by depositors withdrawing their deposits
from a bank, but the timing of when these costs are felt is under the control of the depositor outside of a failure.)
Thus, despite being greatly reduced through the provision of unlimited deposit insurance, incentives to run will
remain. These incentives are likely minimal.

54
to some degree with interest rate restrictions on deposits. There is longstanding historical precedent
for the use of interest rate controls as a tool to constrain bank risk-taking, dating to the establishment
of federal deposit insurance in the United States and the Banking Act of 1933, and implemented
through Regulation Q (discussed in Section 3). Although general interest rate restrictions on deposits
were gradually removed starting with the Depository Institutions Deregulation and Monetary Control
Act of 1980 and ending with the repeal of Regulation Q in 2011, they are still used to limit risk-taking
incentives of less than well-capitalized banks under the Financial Institutions, Reform, Recovery, and
Enforcement Act of 1989. Under a significant expansion of the deposit insurance safety net, it is worth
considering whether interest rate restrictions are warranted to mitigate moral hazard concerns.

Broader Market Effects

The competitive effects from a regime change to unlimited deposit insurance are potentially large.
Deposits exist within a broad range of competing financial products. Absent accompanying changes in
returns, extending deposit insurance coverage to all deposits will make deposits more attractive
relative to other products. This would increase customer demand for deposit products and reduce
demand for other competing assets. To the extent a significant shift toward deposits occurs, deposit
rates and asset prices would adjust to reach a new equilibrium allocation of aggregate investment
across products.

Consistency and Transparency

Explicit insurance coverage of all deposits produces a consistent and transparent deposit insurance
framework. All depositors know with certainty that their deposits are safe. Expanding insurance
coverage to all deposits and depositors minimizes potential differentials in coverage based on a
customer’s ability or knowledge about the opportunities for expanded coverage, for example, through
pass-through coverage. 133

Fund Adequacy

Unlimited deposit insurance coverage would have significant implications for the size of the DIF.
Before accounting for possible deposit inflows, unlimited deposit insurance would increase the size of
the DIF required to achieve a given ratio of the Fund to insured deposits by about 70 to 80 percent. 134
The need to increase the DIF would require that the FDIC raise assessments on banks and maintain
them at levels significantly higher than their current levels. In addition, unlimited deposit insurance
may warrant an adjustment to the designated reserve ratio. FDIC losses would be higher in a failure,
other things equal, because there would be no uninsured depositors to take loss. Failures may be less
costly if unlimited deposit insurance prevents costly bank runs or more costly if it allows risks on bank
balance sheets to go unaddressed for long periods of time.

133
An important caveat is that unlimited insurance would apply to domestic deposits, retaining the currently
explicit absence of coverage of foreign deposits.
134
As of fourth quarter 2022, the DIF was $125.5 billion, the reserve ratio was 1.27 percent, and estimated insured
deposits were $10.1 trillion. To meet the minimum reserve ratio of 1.35 percent the DIF would need to be $136.4
billion. If all of the $17.8 trillion of domestic deposits were insured, everything else equal, then the DIF would
need to be $240 billion to reach a reserve ratio of 1.35 percent.

55
Targeted Coverage
A third option for deposit insurance reform is to offer different deposit insurance coverage across
account types, or Targeted Coverage. This option may extend unlimited coverage to some account
types and provide limited coverage to others, or it may provide limited coverage across all account
types but with different limits. This option may help target financial stability objectives associated
with higher or unlimited insurance while maintaining depositor discipline and mitigating disruptions
across markets that compete with deposits. Targeted Coverage is analogous to the TAG program
discussed in Section 3. For this option, the qualifying accounts could be analogous to or different than
those in the original TAG program. 135

The account types that may merit higher coverage are those used for payment purposes, specifically
business payment accounts.136 Conceptually, deposits have two distinct purposes: payments services
and investment. Payments services enable depositors to easily transfer monetary value as part of the
exchange of goods and services. In contrast, the primary purpose of deposits used for investment is to
provide depositors a store of value and a return on investment. While deposits used for investment
have many substitute products against which a depositor can assess a risk-return tradeoff, deposits
used for payments services have fewer substitutes. Further, deposits used for investments are not
essential to support the daily operations of households and businesses: investors regularly incur
losses to investments without prompting significant financial or economic spillovers. In contrast,
deposits used for payments are essential for businesses and households to manage cash inflows and
outflows. Losses to deposits used for payments—or a delay in access to deposit funds—can abruptly
debilitate daily operations.
Business payment accounts are not currently defined in the structure of the deposit insurance system
but must be identifiable for the viability of Targeted Coverage. Practically, such accounts may be
measurable by first distinguishing the identifier associated with the account: for example, using a tax
identification number (TIN) or employer identification number (EIN) rather than a social security
number (SSN). In addition, business payment accounts may be distinguished from other accounts
using account features. For example, business payment accounts may be defined as those that are
demandable and do not pay interest (or do not pay interest above some benchmark). In addition to
creating a practical definition to identify business payment accounts, delineating between accounts
eligible to receive higher coverage is a major challenge and discussed further below. 137

135
Although not entirely analogous, the European Bank Recovery and Resolution Directive (B provides
differential priority in a resolution between natural persons and small businesses. Article 108(1)(a) of Directive
2014/59/EU (BRRD). https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-
rulebook/100804
136
The definitions used may broader than business payment accounts, for example, all transaction accounts,
such as those used in the TAG. Broader definitions may be more practical to implement or may serve a broader
policy object to also include households that require large account balances for transaction purposes.
137
As a back-of-the-envelope calculation, median monthly income in the United States in fourth quarter 2022
was $4,878 (Bureau of Labor Statistics, not seasonally adjusted, weekly income multiplied by 4.34). Defining
small businesses as those with less than 500 employees, a deposit insurance limit of $2.5 million for accounts
with either an EIN or TIN (rather than a SSN), would likely cover payroll for a large proportion of small- and

56
There is also an argument to differentiate business payment accounts from other accounts from an
efficiency perspective. It is likely that deposit accounts used for operational purposes are more
difficult to maintain across multiple banks to obtain greater deposit insurance coverage. There are
also likely large inefficiencies in managing daily inflows and outflows across multiple banks relative to
accounts used for investment purposes. Thus, business payment accounts are least able to take
advantage of insurance across banks in the current system.

The main challenges of Targeted Coverage are the practical considerations when defining account
types that receive higher insurance coverage to ensure that the criteria for qualifying accounts are
strictly defined and cannot be easily circumvented, especially given recent improvements in financial
technology. For example, individuals, trusts, or estates may exploit account definitions and adopt
EINs or TINs to obtain higher coverage under Targeted Coverage. In addition, banks and depositors
may find other ways to circumvent restrictions placed on accounts with higher coverage. For instance,
a bank may offer accounts with no interest but where loyalty “points” can be accrued and redeemed
for gift cards or even cash. Alternatively, or in conjunction, banks could offer lower loan rates to
customers who have noninterest-bearing accounts. Banks will be incentivized to pursue these or
other innovations to attract deposits. Given the rapid pace of financial and technological innovation,
it may be challenging for regulators to stay ahead of new product offerings.

Alternatively, banks may offer accounts with sweep arrangements in which deposits are regularly
transferred from one type of account into another in ways intended to combine the advantages of
investment-type accounts with the advantage of increased coverage of the transaction account.
Deposit sweep arrangements may complicate failure resolution since failing banks may close either
during regular business hours or at other times. Though banks may have to provide formal notice to
depositors, depositors may not comprehend the implications of sweep programs. For example, some
depositors may not read the relevant disclosure documents, or some may agree to sweep programs
when opening an account and later forget. The increased complexity may cause some depositors to
believe that they have higher insurance coverage in specific accounts when in fact they do not.
Ultimately, the distinction between accounts with higher coverage and other account types should be
based on criteria that are easily accessible and distinguishable between accounts, and that are clearly
defined and disclosed in ways that depositors understand. Since large amounts of uninsured deposits
may remain in banks under this option, it may be appropriate to consider other tools such as those in
Section 5 to mitigate the risk of banks runs.

The separation of accounts by function—payments and investments—is a key concept of Targeted

Coverage. Consequently, interest rate restrictions (as discussed in Section 3 and in Unlimited
Coverage) on accounts with higher coverage may be an important consideration for implementation
of Targeted Coverage. Similarly, large deposit accounts that are not eligible for higher coverage
should have clear restrictions on withdrawals to maintain a clear separation of payments and
investment functions. In delineating accounts, it is important that large deposit accounts do not
simultaneously offer insurance coverage, liquidity, and high yield.

medium-sized business payment accounts. Such a calculation excludes other business expenses which vary by
business type, and ignores variation in monthly earnings.

57
The costs associated with conducting a deposit insurance determination associated with Targeted
Coverage are similar to those for Limited Coverage or potentially higher, depending on the how
accounts are identified. For example, accounts receiving higher coverage may be viewed as an
additional ownership right and capacity over which accounts must be aggregated before applying the
deposit insurance coverage limit, which could complicate deposit insurance determinations. As
discussed in Limited Coverage, deposit insurance simplification may provide additional benefits when
considered in tandem with Targeted Coverage.

Financial Stability

Providing increased coverage to specific types of accounts has several advantages. First, it allows for a
form of targeting, in which additional insurance is provided depending on the needs of customers and
financial stability objectives, rather than being constrained to using only one limit to serve all account
types. The original TAG program served the needs of businesses, nonprofit organizations, government
municipalities, and other entities that needed ongoing use of large deposit amounts (e.g., for
payroll). 138 In serving these needs, the original TAG program increased financial stability overall and
benefited the broader economy.
The primary source of run risk that generates financial stability concerns is demandable deposits,
especially those deposits used for operational purposes. Business payment deposits are less easily
diversifiable across banks, and business accounts in this category may become very large. Providing
greater or unlimited deposit insurance to business payment accounts provides the benefits of higher
insurance without extending the guarantee to large depositors whose deposits are used for
investment purposes.
Increasing coverage to large deposit accounts with the most demand for liquidity would reduce or
eliminate the need for depositors of such accounts to withdraw their funds out of fear for the safety of
their deposits and for the continuity of their operations. This would have benefits for financial
stability, as these depositors are not expected to discipline risk-taking by demanding a higher return,
but instead have a strong incentive to run in response to solvency concerns. Large investment-type
deposits, which would remain uninsured, could still expose banks to risk of runs or periods of funding
stress if these uninsured funds do not roll over when they mature.

Like Limited Coverage, the financial stability benefits of Targeted Coverage relate to the amount of
the increase in the deposit insurance limit, especially as it pertains to demandable accounts. If there
remain large uninsured demandable accounts, additional tools to further promote financial stability
should be considered. For example, large, partially covered, demandable accounts may need to be
subject to other restrictions (such as collateralization or limits to liquidity or a limited draw schedule,
discussed later in this section) that limit the associated run risk.

Moral Hazard, Market Discipline, and Depositor Discipline

The primary drawbacks to providing greater or unlimited coverage to specific account types are the
potential loss in depositor discipline and resulting implications for bank risk-taking. With respect to

Depositors excluded from TAG program coverage were primarily those holding higher interest-bearing
138

accounts that appear more similar to investors than those using their accounts for ongoing operating expenses.

58
depositor discipline, operational business depositors may be poorly situated to evaluate the risks on
their bank’s balance sheet relative to investors, since the primary focus of the owner of a business
payment account is running a business. By providing higher insurance coverage to these types of
accounts, the deposit insurance system may reduce inefficiencies created by maintaining many
business payment accounts across banks and benefit those for whom financial stability concerns are
highest. Interest rate restrictions on accounts with higher coverage can also mitigate moral hazard
concerns from increased deposit insurance.
With Targeted Coverage, one may conjecture that the loss in depositor discipline would occur for
holders only of previously uninsured accounts that are now insured; however, the resulting loss to
depositor discipline may apply more broadly. Beyond the standard tradeoffs involved in deposit
insurance reform, there are unique advantages and challenges to implementing Targeted Coverage.

Under Targeted Coverage, instead of running in response to bank solvency concerns, depositors may
simply move their deposits to an account with higher coverage within the same bank, to the extent
they are able. Consequently, depositor discipline is weakened because the deposits do not flee the
bank. Though it weakens depositor discipline, the ability to obtain more insurance by moving
deposits across accounts within the same bank may increase financial system stability. First, because
deposits remain within the same bank, the bank is under less pressure to liquidate assets. Second,
panic-driven runs are less likely if depositors can obtain greater insurance by switching account types
or transferring funds to a different account within the same bank. Third, the movement of funds to
more highly insured accounts can itself serve as an early-warning signal for bank supervisors,
managers, and boards to rectify risky behavior that may drive a flight to safety of deposits within the
bank.

Broader Market Effects

Increasing or fully insuring only business payment accounts would limit disruptions to other asset
markets that compete with deposits as investment vehicles. For example, absent a full insurance
option on a business payment account at a single bank, a small or medium-size firm that needs
liquidity to meet its day-to-day operations may allocate its funds across multiple banks and substitute
products, weighing a combination of safety, convenience, and yield. Given the choice to keep its
business payment accounts fully insured, the firm may willingly sacrifice yield, or may even pay a
premium, to do so. In contrast, an investor seeking yield may find restrictions on business payment
accounts (such as rate caps) insufficient to justify the benefit of insurance. Thus, to the extent that
business payment accounts can be distinguished from investment accounts, Targeted Coverage may
support banks in their essential role in the payments system while minimizing the distorting effects
that unlimited or increased deposit insurance may have relative to other assets.

Consistency and Transparency

Targeted Coverage may increase complexity compared with other options for deposit insurance
reform. Even in its most basic form—for example, with two types of accounts (qualifying vs. non-
qualifying) and two different limits—differential insurance would naturally generate questions from
depositors about the actual insurance limit on their accounts. Because the criteria for qualifying
accounts would need to be detailed, many depositors might find the criteria difficult to understand. It

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would be important for banks to be transparent about the insurance limits and relevant account
details, and new disclosure requirements may need to be considered. Banks may need to clearly and
regularly specify to depositors the insurance limit associated with each account type (e.g., at account
opening, on their account webpage, and on account statements).

Increased or unlimited deposit insurance for business payment accounts would reduce the role of
perceived protection against uninsured depositor losses, providing greater consistency and
transparency.

Fund Adequacy
Offering increased or unlimited insurance on only specific accounts would reduce the exposure of the
FDIC in a failure, as compared with full insurance on all account types (holding constant the risk of
bank failure), though this option would still entail a significant expansion of the DIF. The extent to
which the DIF would need to expand would be a function of both how business payment accounts are
defined and the extent to which the demand for business payment accounts results in inflows from
other asset markets. Although assessments would likely need to increase, it is difficult to estimate to
what extent.

Excess Deposit Insurance Coverage

In addition to changes in deposit insurance coverage, there are options that would address different
aspects of the current deposit insurance system. These warrant consideration alongside the options
for changes in deposit insurance coverage.

Excess deposit insurance, or voluntary coverage for deposits above the insurance limit, may be an
option alongside changes to deposit insurance limits. In theory, optional coverage may be provided at
the bank or depositor level, and may be provided by the private sector, by the FDIC, or by a
combination.

To be credible, an insurer must have the funds to cover the loss event against which it is insuring.
Excess deposit insurance would have to address the concentration of deposits in a single institution
that is subject to a loss event, the correlation of loss events across small institutions associated with
banking crises, and the combination of the two. Absent the federal government backstop, it seems
unlikely that private insurers can address those risks sufficiently to provide enough coverage to
significantly enhance financial stability. The existing private excess deposit insurance market is
limited in scope and coverage and does not address the challenge of industry concentration of
uninsured depositors in large institutions. 139 In an optional excess deposit insurance program, banks
or depositors who pose systemic risks for which the program is designed would need to opt in for the

139
Some organizations that offer excess deposit insurance but it is limited in scope, provides limited coverage, or
the issuers retain the right to cancel, or all three. At least one such insurer abandoned offering coverage as the
financial crisis took hold in 2008. The Deposit Insurance Fund in Massachusetts is a private, industry-sponsored
fund that provides excess insurance for all deposits above the FDIC coverage levels. Most member banks are
either savings or cooperative banks. As of year-end 2022, member banks had approximately $77.8 billion in
deposits, with insured excess deposits of $28.6 billion. The Massachusetts fund had a $487 million fund balance.
https://www.difxs.com/DIF/Home.aspx

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program to be effective. If large banks or depositors opt out, historical experience is that they may
continue to expect support from future interventions but would not bear the associated costs.
Coverage that is optional neither changes perceptions about future support nor does it impose a cost
on those benefiting from those perceptions.

Accurate pricing of bank risk-taking for deposit insurance is already a challenge. Pricing excess
deposit insurance would be an even larger challenge given the adverse selection problem: banks or
depositors who opt into an excess deposit insurance system are likely to have different characteristics
than banks or depositors who do not opt in. Fair pricing would require that the FDIC account for the
decision to opt in, in addition to the typical challenges associated with pricing.

Financial Stability

The effects of excess coverage on financial stability would depend upon the participation of uninsured
depositors. If participation is sufficient and funds are available in a timely manner, excess deposit
insurance would have significant stability benefits. If there is insufficient participation or payment on
excess deposit insurance claims were delayed, however, excess deposit insurance would have limited
impact on financial stability.

If excess deposit insurance were offered at the bank level, it is likely that banks most exposed to bank
runs would opt in. Thus, voluntary participation has a beneficial aspect of encouraging participation
of banks for whom run risk is highest. Banks would have an incentive, however, to opt in when they
are experiencing stress or are near failure. For a viable system, eligibility requirements to opt in would
be necessary; if some banks are not eligible, they would still be exposed to runs and thereby affect
financial stability.

Deposit insurance for an individual depositor at a bank reduces that depositor’s incentive to run and
reduces run risk at that bank. Similarly, the decision of an individual bank to obtain excess deposit
insurance coverage reduces the contagion risk within the banking system. When choosing a level of
excess coverage, individual depositors and banks are likely to consider only the benefits of coverage
to themselves and are unlikely to consider the benefits they bring to the system when opting in. Thus,
the benefits to the system are likely higher under mandatory coverage relative to voluntary coverage.

Moral Hazard, Market Discipline, and Depositor Discipline

The implications of excess deposit insurance on moral hazard, market discipline, and depositor
discipline are ambiguous. Depositors who exhaust significant resources to monitor banks may find it
preferable to obtain voluntary excess deposit insurance, if offered. If depositors who previously
monitored the bank opt into voluntary coverage, excess deposit insurance would have significant
effects on depositor discipline, with associated effects on moral hazard and bank risk-taking. But if the
least resourced depositors who currently monitor less have strong preferences for insurance and are
most likely to opt in, then the effects of excess deposit insurance coverage on risk-taking incentives
would be smaller.

If instead excess deposit insurance was offered at the bank level, it is likely that that those banks most
exposed to bank runs would opt in. So long as deposit insurance pricing does not perfectly account
for the associated run risk, moral hazard is likely to increase for banks most prone to risk-taking.

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Tools such as deposit insurance pricing may be used alongside excess deposit insurance coverage to
mitigate moral hazard. However, voluntary insurance programs are subject to adverse selection
problems that affect other insurance programs: the agents that opt into the insurance program are
those for whom the expected benefits of insurance exceed the costs of participation. Fair risk-based
pricing for deposit insurance is already a challenge, and adverse selection makes the challenge of fair
pricing of voluntary deposit insurance even greater.

Broader Market Effects

Voluntary excess deposit insurance is unlikely to have notable broader market effects. Especially for
small banks, there already exist private excess deposit insurance programs for which deposit
concentrations are not as significant of a concern as they are in the broader economy. It is unclear
that broader market effects are significantly different in the presence of excess deposit insurance.

Consistency and Transparency

Excess deposit insurance likely would not significantly improve the consistency and transparency of
the deposit insurance system. Financial stability concerns would continue to motivate perceptions of
future interventions of support.

Fund Adequacy

If excess deposit insurance coverage were to be funded by the DIF, then banks who did not opt into
the program would share the risk with those that opted in. Given its structure, an excess deposit
insurance system would therefore likely be managed in parallel to the DIF and would not have direct
implications for Fund adequacy. However, if a separate insurance fund is created for the program,
then it would risk being underfunded.

In addition to adverse selection problems across banks, there is also an adverse selection problem
across time that would inhibit the adequacy of an excess deposit insurance system. During periods of
financial calm, the incentive to participate in a voluntary program are low when compared with
periods of economic stress. An excess deposit insurance fund is likely to struggle to maintain
adequacy to cover the difference in demand for deposit insurance over the financial cycle.

Additional Options
Under Limited Coverage and Targeted Coverage, large concentrations of uninsured depositors may
remain. This section of the report considers two options that may complement those options to help
achieve financial stability objectives in the current environment.

Require Secured Deposits for Large Uninsured Deposits

Requiring that short-term liabilities are funded with short-term assets is a commonly proposed
solution for solving the financial stability challenges associated with runnable liabilities. Backing
short-term liabilities, such as deposits, with safe, short-term assets effectively separates the payments
system and credit intermediation functions of banks.

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Some specific segments of the deposit market already segment the payments system and
intermediation functions of banks. Depending on state or federal law, otherwise uninsured deposits of
state, county, or municipal governments, and their political subdivisions, are secured by collateral or
assets of the bank.140 In the event of failure, the FDIC honors valid and enforceable collateralization
agreements applicable under law. The value of the collateral, however, may not be sufficient to cover
the uninsured amounts at par.

Although the tradeoff between stability and credit intermediation may not justify a collateralization
requirement for large uninsured deposits, the experience of public deposits suggests that there may
cases where the public interest in financial stability outweigh the associated costs to credit
intermediation. The challenges posed by concentrations of large deposits at large institutions suggest
that for such depositors and institutions, mandating that uninsured deposits, or possibly those above
some larger dollar threshold, be secured by safe assets merits consideration.

Among the benefits of collateralizing deposits for large depositors is that it decreases the depositor’s
burden of monitoring. Rather than requiring depositors to understand bank financial statements and
assess the riskiness of their portfolio, or make conjectures about the likelihood of a systemic risk
determination, depositors need only to understand the evaluation of the specific, well-defined
collateral backing their deposits. Such an expectation is the norm for custodians of funds at
municipal, county, and state governments and can therefore be seen as a reasonable expectation for
decision-makers at large firms. If secured depositors are more attuned to monitoring collateral, they
may also impose increased haircuts, which may also serve as an early-warning signal to supervisors.

An additional benefit of secured deposits is that they allow private markets to price the risks
associated with concentrated short-term liabilities. Banks that issue uninsured deposits would
continue to provide liquidity but would expand their balance sheet, and would likely pass those costs
to the large depositors. Doing so would discourage the largest depositors from cash hoarding,
especially at a single financial institution, and would discourage large depositors from relying on
market perceptions of support to earn yield: uninsured deposits used for investment rather than
transaction services would likely benefit from investing directly in the desired collateral rather than
through the costly expansion of bank balance sheets.

However, secured deposits likely would not entirely solve the problem of runs if an institution is
suddenly revealed to be undercapitalized. As in repo markets in 2007–2008, 141 short-term
collateralized loans also may be subject to runs. Upon realizing that its financial institution may be
undercapitalized, a secured depositor is likely to prefer withdrawal to recouping collateral in a
resolution process and incurring the valuation risk associated with the collateral in a failure.

From a competitive standpoint, the collateralization of deposit services for the largest depositors is
likely to affect primarily large institutions that hold most of the uninsured deposits. Aggregate large
bank credit supply could be curtailed relative to smaller institutions. Whether overall credit supply is
reduced depends on the ability of smaller banks and nonbank financial intermediaries to meet the

140
FDIC, Deposit Insurance for Accounts Held by Government Depositors.
https://www.fdic.gov/deposit/deposits/factsheet.html
141
Gorton and Metrick (2012).

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demand. From the perspective of deposit market competition, secured deposits are likely to make
small banks less competitive for the largest uninsured deposits given their balance sheet capacity.
However, small banks are already less competitive for uninsured depositors, especially the largest
depositors who might be targeted by a collateralization requirement. Requiring collateral for large
deposits also would limit the capacity of insured institutions to provide the deposits. Requiring the
collateralization of large deposits may therefore lead to both reductions in credit supply and a
reduced capacity of the system to meet the demand for large deposits. Although both outcomes are
consequential, such outcomes may be the result of a current mispricing of the liquidity risk posed by
large quantities of uninsured deposits due to market perceptions of support in crisis.

Mandating the collateralization of large uninsured deposits also could have broader market
implications. Banks issuing uninsured deposits would have greater demand for safe, short-term
assets, thereby driving up the price. Depositors may also find the newly priced deposits unattractive
and migrate out of the banking system. Depending on where the large depositors migrate, the
associated run risk may migrate with them without improving financial stability.

Secured deposits could also have implications for fund adequacy. While an increase in the deposit
insurance limit increases insured deposits and the necessary size of the DIF, converting uninsured
deposits into secured deposits would not directly affect the amount of insured deposits or the reserve
ratio. However, secured deposits stand ahead of the FDIC in the priority of receivership claims, and so
could increase losses to the DIF and uninsured depositors in resolution.
Requiring collateral for uninsured depositors could apply to the entire class of uninsured deposits or
for uninsured deposit accounts above some threshold, and could apply at the depositor or institution
level. Requiring collateralization of some uninsured deposits could also be applied only to banks with
material concentrations of uninsured deposits or other runnable liabilities. While the experience of
public deposits is a natural starting point for operationalizing secured deposits, the costs and benefits
of any mandate on collateral for uninsured deposits is complex and beyond the scope of this report.

Limit Convertibility of Deposits Above the Deposit Insurance Limit

One possibility to limit the extent to which a run by large depositors can inflict sudden damage to a
bank and the broader economy is to limit the full liquidity of large, uninsured accounts.142 Placing
constraints on the ability of large depositors to withdraw funds would be a variation of the bank
suspensions that occurred in large numbers before the creation of the FDIC, but such constraints
could be more tailored than those suspensions were. Such limitations could apply to deposits above
the deposit insurance limit, or at a considerably higher level. They could apply in the normal course of
business, or banks could have the discretion to apply them in the face of financial stress; bank
supervisors could also determine how to apply the limitations.

142
Existing tools limit convertibility for money market funds. For example, SEC Rule 2a-7 passed in 2014 allows a
money market fund board to impose up to a 2 percent liquidity during stress or temporarily suspect
redemptions.
https://www.sec.gov/news/press-release/2014-143

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For example, deposit accounts above some threshold could be restricted from withdrawing more than
some percentage of their account balance within a specified timeframe. 143 Additional withdrawals
would be allowed after the specified timeframe. Thus, the largest depositors would be restricted from
liquidating their accounts on demand. Withdrawal requests that approach or exceed the threshold
may then also serve as an early-warning signal for supervisors. Thus, large depositors would maintain
some skin-in-the-game following large withdrawals, suppressing incentives to incite further panic and
maintaining an interest in the franchise value of a bank in resolution.
In addition to reducing the ability of large depositors to run, limiting liquidity for the largest
depositors may also induce these depositors to diversify funds more broadly across banks, thereby
reducing their concentration at a single bank. A more diversified depositor base may then further
contribute to financial stability.

Finally, limiting the liquidity of large uninsured deposits may increase the incentives of the largest
depositors to exert market discipline in a manner that reduces bank risk-taking. A large depositor with
concerns about bank solvency has an incentive to withdraw funds immediately. If the ability to
withdraw funds is limited, large depositors are more likely to retain exposure to the bank in a failure.
Consequently, incentives of the largest depositors may be more closely aligned with other
debtholders and the resolution authority and may induce those depositors to discipline the bank in a
way that threatens its value in a failure event.

For mismanaged and undercapitalized banks, limiting the liquidity of the largest accounts is unlikely
to prevent a bank failure. Instead, by slowing the run, the FDIC would have time to resolve the bank
through an orderly resolution process, rather than through a costly bank run. Similarly, limiting
withdrawals will not necessarily prevent the contagious spread of concerns about banks’ health.
Knowing that large withdrawals are occurring at some banks may cause large depositors at other
banks to do the same. But again, the limitations on withdrawals could greatly slow the speed with
which liquidity issues can propagate, supporting financial stability and the orderly resolution of
problems.

McCabe, Cipriani, Holscher, and Martin (2012) propose that a small fraction of each MMF investor’s balance be
143

demarcated to absorb loss, a "minimum balance at risk," if the fund is liquidated.

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