By Kenneth Kelly
ABA Viewpoint
Deposit insurance has been a cornerstone of the U.S. banking system for nearly a century protecting customers, strengthening communities, and enhancing the stability of the banks that fund it. The deposit insurance program is one of the reasons we have the world’s strongest and most resilient banking sector.
Despite its success over the years, bankers know the deposit insurance system needs an update to reflect the current realities of the financial services marketplace. The 2023 failures of Silicon Valley Bank and Signature Bank underscored questions about transparency and fairness in the current system, and a more recent failure of a community bank in Oklahoma only added to those questions. The bank failures also raised questions about the authority of regulators to act during a crisis.
The FDIC issued a 2023 report outlining possible options, and other stakeholders have offered their own ideas. To date, no reforms have been implemented and the deposit insurance coverage level remains unchanged since the 2008 financial crisis when coverage was temporarily expanded to $250,000, a change made permanent in 2010.
The American Bankers Association has a long and proud history of taking on hard problems and coming up with solutions that advance the industry, as well as the customers and communities we serve. In that spirit, ABA has spent the last 18 months gathering and synthesizing the thoughts of members and hearing a range of perspectives on modernization from a working group of more than 300 banks. The process revealed a simple truth: every option, including maintaining the current system, involves trade-offs that must be acknowledged and addressed.
In January, ABA CEO Rob Nichols took the next step and created a smaller Task Force on Deposit Insurance Modernization and asked me to lead the effort. The Task Force, comprised of banks of all sizes and charter types, worked diligently over the last seven months to develop a set of recommendations, based on internal deliberations and consultations with outside experts.
The Task Force reached a consensus last month on recommendations we believe the entire industry can support, and the ABA Board approved the recommendations unanimously at its July meeting. This ABA Viewpoint gives us the chance to share our ideas and the Task Force’s full report with the membership, policymakers, and the public for the first time.
These recommendations include some changes only Congress can make and some actions the FDIC can take under its current authority. Notably, the recommendations go beyond possible changes to the deposit insurance limit and include significant adjustments to FDIC’s emergency authorities and its resolutions framework.
We do not suggest that these ideas will answer all the questions raised since the failure of SVB or address the concerns of every bank. As leader of this task force, my goal was to ensure every idea was fairly considered, every bank felt represented, and every effort was made to build consensus.
My Task Force colleagues and I believe these recommendations will make the system better, fairer, and more resilient at times of stress, and for that reason, banks of all sizes should encourage policymakers to give them careful consideration.
At a minimum, we want the Task Force report and recommendations to provide a substantive set of ideas that can help inform and drive the deposit insurance modernization discussion taking place in Washington.
Here are the Task Force’s 10 recommendations:
Emergency actions and authority
1
Congressional pre-approval for enhanced FDIC coverage to mitigate severe stress events. Congress should pre-approve authority for the FDIC to create a program similar to the transaction account guarantee program that would guarantee bank and holding company liabilities during times of severe stress. This step could help reduce the risk of contagion.
2 Improve transparency of systemic risk determinations and special assessments. Congress should require the FDIC to develop guidelines on specific considerations that warrant a systemic risk determination and the methodology it will use to identify beneficiaries for purposes of a special assessment.
Deposit insurance coverage, the Deposit Insurance Fund and assessments
3Ensure the coverage limit and any modifications to it are empirically based and indexed to inflation. Any change in coverage should be data driven, with significant input from the banking industry and other stakeholders. The FDIC should expand its efforts to collect relevant data and info that can help inform the nation’s banks and policymakers on the tradeoffs between specific coverage limit options. Once a limit is established, it should be indexed to inflation.
4Maintain a Deposit Insurance Fund that is stable and properly calibrated to risk. The FDIC should continue to use a risk-based approach when setting assessments and ensure its methodology is based on modern risk principles.
5Make deposit insurance assessments tax-deductible. Congress should reverse the Tax Cuts and Jobs Act of 2017 sliding-scale method for determining the deductibility of FDIC assessments.
6Evaluate the costs and benefits of offering additional insurance for purchase by individual banks. Allowing banks to purchase excess deposit insurance would likely result in lower costs for banks relative to excess deposit insurance products provided by the private sector. The FDIC should evaluate the potential costs and benefits of such an approach.
Bank resolutions
7Broaden the scope of considerations applied in determination of “least cost” to include potential contagion or other unwanted impacts. Congress should allow the FDIC to consider the cost of resolutions strategy on a wider range of banks or the industry not just the deposit insurance fund.
8
Enhance community bank participation in resolutions to preserve essential banking services. Congress should allow the FDIC to consider the cost of resolutions strategy on communities and provide the FDIC with the power to balance the least cost test for community bank failures with options to mitigate negative impacts, such as loss of essential banking services, on the relevant communities.
9
Open resolution-associated asset auctions to a greater diversity of investors. This change would enhance fairness in the failed bank bidder qualification process, increasing the spectrum of institutions permitted to bid on failed institution franchises and assets.
10
Publicly release resolution approaches considered in a given case and their respective estimated costs. The FDIC should release the resolution approaches considered and the estimated costs of each failure to improve the transparency and accountability associated with failed institution resolutions.
Next steps
In addition to sharing these recommendations with ABA members and our state association alliance partners, ABA will begin briefing policymakers in Washington to urge their consideration of these changes. We are also sharing these recommendations with fellow banking trades and other relevant stakeholders for their feedback. We remain open to constructive changes, and welcome others to offer their own proposals.
This is the right time to make these reforms. America’s banks are well capitalized, highly liquid, and positioned to meet the needs of their customers and communities across the country. We want the deposit insurance system modernized before the next moment of stress, so the FDIC has the tools it needs to mitigate and manage the situation.
As I noted earlier, the last major changes to insurance took place during a crisis. By acting now, we can work with all stakeholders to deliver more thoughtful solutions and build public confidence in our banking system, a goal we all share.
These recommendations constitute a pragmatic, measured approach toward ensuring the continued resilience, fairness and transparency of the nation’s deposit insurance regime. We ask all banks to join ABA in advancing these changes.
ABA Viewpoint is the source for analysis, commentary and perspective from the American Bankers Association on the policy issues shaping banking today and into the future. Click here to view all posts in this series.
