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Ampersand Opinion: Should the FDIC Raise Coverage Limits? 

In the 2023 Ampersand Depositor Priorities Survey, over 61% of respondents reported being concerned about the safety of their bank deposits in March of 2023, and 55% reported being concerned about bank safety into the future. 

Given that bank failures continue to be a common concern of both business and financial industry leaders alike, it’s no surprise that calls to increase FDIC coverage limits have increased. However, the solution to protecting depositors isn’t as cut and dried as simply increasing these limits. 

How FDIC Insurance Works

FDIC insured deposits are protected via coverage from the Deposit Insurance Fund (DIF) operated by the FDIC. This fund receives its income via fees assessed on FDIC insured banks as part of their yearly assessment. Assessment rates are based on the health and safety rating of each bank – the more at risk a bank is, the higher the assessment fee.

Banks are assessed based on their safety and soundness, which consists of a CAMELS rating, as well as other items including call reports or information from state examination findings. The bank’s capitalization is also taken into account. 

Consequences of Increasing FDIC Coverage

Although it seems like a logical solution, increasing these assessment fees could lead to second and third order consequences that could negatively impact depositors.

As banks face increased assessment fees, they may offer lower rates on their deposit accounts, limiting the ability of depositors to have competitive rates. Additionally, smaller community banks may not be able to shoulder the burden of increased assessment fees – regardless of their health. This is because assessments do not take into account total asset size in terms of amount paid into the DIF. So, a small, healthy bank would pay the same rate as a large one. This burden may prevent community banks from growing, or cause more consolidation of these banks altogether. 

This is particularly concerning given that community banks are vitally important in the American economy – supporting small business, home ownership, and community banking. 

Lastly, increasing FDIC insurance coverage offered on depositor funds gives banks less incentive to carefully manage their loan risk profile to protect depositor funds. This means that if depositors are protected regardless of bank activity, banks may be more likely to take risks in an attempt to increase earnings. 

Possible Solutions 

While it isn’t desirable to raise FDIC coverage limits overall, there are possible solutions that could offer depositors increased safety while protecting banks from burdensome additional fees. 

One such solution is that the FDIC could be raised for business operating accounts that are non-interest bearing. This protects vital business accounts and doesn’t increase costs on banks via increased assessment fees and higher interest rates paid on those accounts.

This solution could be  similar to the functionality of the Transaction Account Guarantee Program that was part of the FDIC’s Temporary Liquidity Guarantee Program established during the financial crisis of 2008, which functionally ended in 2012 after the passage of the Dodd-Frank Act in 2010.  However, this solution would be a limited transaction account guarantee, capped at a certain amount.

This type of solution would provide retail or large depositors additional protection, enabling them to better withstand a possible bank failure. 

As it stands, however, the current deposit insurance coverage limit remains at $250,000 per tax ID per account, making it more critical than ever to have a deposit management strategy in place.

Wondering about the safety of your deposits? Find out where you stand. Contact Ampersand for a FREE risk assessment.

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