WASHINGTON- A recent report from the Federal Deposit Insurance Corp. he pointed to increased deposit insurance coverage for certain business accounts as the most promising policy response to the recent spate of bank failures.
But so-called “targeted insurance” poses significant administrative challenges to make it work as intended, the agency said, and experts say getting Congress to give the FDIC the authority before the 2024 election It’s unlikely.
“The FDIC’s quasi-recommendation that Congress increase coverage of business payment accounts is the kind of idea that could garner substantial theoretical support in Congress, but is unlikely to progress as Washington becomes consumed by the debt limit,” said Ian Katz, a policy analyst at Capital. alpha partners. “We believe that for a share insurance increase to become law, an external push is needed, such as another major bank failure.”
The FDIC itself touted targeted insurance as a reasonable means of ensuring that if a bank fails, the bank’s business customers are not collateral victims of that failure, as was the concern over the failure of Silicon Valley Bank. Targeted insurance could lower moral hazard and reduce the risk of bank runs, according to the FDIC report. But any change to share insurance requires Congress to act.
“Commercial payment accounts are not currently defined in the structure of the deposit insurance system, but they must be identifiable for the viability of specific coverage,” an FDIC official said at a news conference to discuss the report. “Any change to deposit insurance coverage levels would require action by Congress.”
While personalized coverage is the preferred path forward, the FDIC report also emphasized that implementing such coverage, even with congressional approval, poses administrative challenges.
The promise of higher insurance coverage may entice consumers to misrepresent eligibility, and the agency said targeted coverage could also create moral hazard if banks compete for business deposits and fail to account for the risks those deposits may introduce.
“Individuals, trusts or estates can exploit account definitions and adopt [employee identification numbers or tax identification numbers] to obtain higher coverage under a specific coverage,” the report said. “In addition, banks and depositors may find other ways to circumvent the restrictions placed on accounts with higher coverage. For example, a bank may offer interest-free accounts, but in which loyalty ‘points’ can be accumulated and redeemed for gift cards or even cash. Alternatively, or in conjunction, banks could offer lower loan rates to customers with non-interest-bearing accounts.”
Many banking industry experts support the specific insurance proposal, even though much of the proposal’s effectiveness hinges on the effectiveness of as-yet-unwritten regulatory language.
“I don’t think the operational problems, while notable, are in any way insurmountable,” said Karen Petrou, managing partner at Federal Financial Analytics. “There are already numerous ways to play around with the coverage that the FDIC seeks to control through reporting requirements, etc. If these accounts are non-interest bearing and available only to non-individual entities or other corporate structures the FDIC wishes to include , this will work just as well as most other coverage limits.”
Former FDIC attorney Todd Phillips believes that while increasing coverage could lead banks to take some deposit funds for granted, the FDIC’s approach would be more coverage for accounts used by businesses for convenience. to pay expenses like payroll, instead of excessive investments that seek high returns.
“Depositor discipline is important, but only to the extent that depositors can fully assess the strength of institutions,” Phillips said. “Uninformed depositors’ races don’t help anyone. I think the FDIC’s targeted insurance proposal makes a lot of sense and should be considered by Congress.”
The banking industry, for its part, stressed the need to consider how any increase in deposit insurance coverage affects assessment fees.
“Today’s FDIC report on options for deposit insurance reform can serve as a useful starting point for a discussion of these important issues,” said Rob Nichols, president and CEO of the American Bankers Association, it’s a statement. “It certainly won’t be the last word given the need to consider input from the nation’s banks that pay for the current system through their reviews, Congress, and other key stakeholders before acting on any of the FDIC’s ideas. “.
Katz said there is still a chance Congress will accept the FDIC’s proposal, particularly if the debt ceiling is raised and the legislature moves on to other funding bills that must pass.
“The best chance may be to have the idea tie into unrelated legislation due later in the year,” Katz said. “But even that would require lengthy debate, including hearings, in Congress. One stumbling block could be opposition from some banks, because an increase in insurance limits would require higher FDIC assessments on banks.”