Options for Deposit Insurance Reform to Stabilize Our Banking System and Protect Depositors

Since the banking panics of the early 1930s, the US has offered federal deposit insurance (FDI) on eligible deposit accounts up to a statutory limit, currently set at $250,000. In addition to protecting small depositors’ money, FDI has been remarkably successful in preventing bank runs and mitigating financial panic—until recently. Though FDI’s current cap well exceeds the account balances of most Americans, banking system reliance on uninsured deposits has been increasing in recent years, especially as economic inequality has worsened (Vuillemey 2023). The collapses of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank (FRB) have exposed vulnerabilities in—or at the very least cast doubt on—FDI’s current terms and structure. Is FDI protecting the “right” depositors at the “right” coverage threshold? Is it maximizing the government’s ability to avert a financial crisis and, if one occurs, contain it with minimal contagion to the rest of the US economy? And finally, because FDI applies to individual and institutional depositors alike, who is the banking system for and what does that imply about the government policies and practices in place to serve them? The answers to all of those questions carry policy implications for depositor confidence, US financial stability, and bank industry concentration.

Taking lessons from the bank failures that happened in the spring of 2023, many experts have outlined their preferred ways to reform FDI. These proposals vary widely, but all reckon with similar themes: financial stability, depositor protection, market discipline, and moral hazard. I synthesize the bevy of proposals below (and in a recent brief for the Roosevelt Institute) in an effort to better understand the policy trade-offs to our banking system and the individuals, families, and businesses that rely on it.