FDIC recommends overhauling US bank deposit insurance system

The Federal Deposit Insurance Corporation, FDIC, is recommending that the United States rethink its decades-old policy of insuring up to US$250,000 in bank deposits and replace it with an overhaul that would allow regulators to cover higher amounts on a “targeted” basis.

The proposed change appears to openly acknowledge that the FDIC is looking for ways to calm both depositors and markets as the organization contends with the third US bank failure this year. First Republic Bank became the second largest failure in history Monday when regulators seized it and JP Morgan Chase stepped up as a buyer.

“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,” FDIC Chairman Martin J. Gruenberg said in a statement Monday accompanying the regulator’s recommendations.

The FDIC is a government agency formed during the Great Depression to restore faith in US banking institutions

Under the proposal, the FDIC would offer business account coverage a higher levels than ordinary consumer deposits receive, the FDIC said.

As of December, more than 99 per cent of US deposit accounts held less than US$250,000, and so were automatically covered by existing FDIC insurance, Gruenberg said.

However, the system remains subject to the sort of bank runs that brought down First Republic, despite a consortium of big lenders having pooled US$30 billion in cash to shore up the bank as recently as March.

Last Monday, First Republic reported its first-quarter results, shocking investors when it revealed that depositors had withdrawn $100 billion, most in mid-March immediately after Silicon Valley Bank and Signature Bank failed. First Republic’s stock plunged more than 50 per cent the day after the report.

AP