Feature Article: 

Establishing Voluntary Excess Deposit Insurance: 

Results of the 2006 FDIC Study 

Foreword A Changed Banking Environment 

The Federal Deposit Insurance Corporation (FDIC) was 

required by the Federal Deposit Insurance Reform Conforming Amendments Act of 2005 (FDIRCAA) to study 

the feasibility and consequences of privatizing deposit insurance, establishing a voluntary deposit insurance system for 

deposits in excess of the maximum amount of FDIC insurance, and increasing the limit on deposit insurance coverage 

for municipalities and other units of general government. In 

February 2007, the FDIC sent its report to Congress. The 

results of the FDIC’s findings on privatizing deposit insurance appeared in a previous issue of the FDIC Quarterly 

(available at http://www.fdic.gov/bank/analytical/ 

quarterly/index.html).1 This article summarizes the 

FDIC’s findings on establishing a voluntary deposit insurance system for excess deposits. The results of the FDIC’s 

study on providing for increased coverage on municipal 

deposits will be presented in a future issue of the FDIC 

Quarterly. 

Introduction 

In 2006, in response to the Federal Deposit Insurance 

Reform Conforming Amendments Act of 2005 

(FDIRCAA), the FDIC studied the feasibility of establishing a voluntary deposit insurance system for 

deposits that exceed the maximum amount of FDIC 

insurance. This study concluded that market changes 

during the past two decades have lessened the demand 

for excess deposit insurance and provided depositors 

with other options to protect excess deposits. This article examines the factors that have shaped this new 

banking environment. It then looks at two approaches 

to offering excess deposit insurance and identifies key 

issues to be resolved should Congress authorize an 

FDIC role in the provision of excess deposit insurance. 

1 Christine Bradley and Valentine V. Craig, “Privatizing Deposit Insurance: Results of the 2006 FDIC Study,” FDIC Quarterly (Second Quarter 2007): p. 23–32. 

The banking environment has changed considerably 

since the early 1990s in response to a return to banking industry profitability, technological advances, and 

product developments in the private sector. As a 

result, the demand for various forms of excess insurance has diminished. 

The Banking Industry’s Return to Stability and 

Profitability 

The return to industry stability and profitability after 

the turbulence of the late 1980s and early 1990s has 

reduced the demand for private excess deposit insurance. A number of private excess deposit insurance 

plans were implemented in the early 1990s, but 

many—such as the Depositsure program, offered by 

Centrex Underwriters Inc.—have been terminated. 

Joseph Carlson, president of Memphis-based Centrex, 

stated that the company expected a “blizzard of applications” for excess deposit insurance when the program 

was created in 1993. However, when profitability 

returned to the banking sector, Centrex found that the 

demand for the product fell below original expectations, and the Depositsure program ceased operation in 

2001.2 Another entrant into this market, Reliance 

National, a subsidiary of Reliance Group Holdings, 

reported being “flooded with inquiries” in the late 

1980s. However, by the time the company developed a 

product, it discovered that “their timing was a bit off.”3 

Examples of firms currently providing excess deposit 

insurance are BancInsure, St. Paul Travelers, and 

Kansas Bankers Surety Company. BancInsure provides 

risk management and risk mitigation services for community banks and other financial institutions and 

offers excess deposit insurance bonds to banks that are 

2 Celia Viggo Wexler, “For Private Deposit Insurers, The Windfall 

Never Came,” The American Banker (July 10, 1996): p. 3. 3 Ibid. 

FDIC QUARTERLY 30 2007, VOLUME 1, NO. 3 
Establishing Voluntary Excess Deposit Insurance 

customers for the company’s other insurance products 

(http://www.bancinsure.com). St. Paul Travelers offers 

excess coverage through a depository bond 

(http://www.travelers.com), as does Kansas Bankers 

Surety Company, a subsidiary of Wesco Financial Corporation. Kansas Bankers Surety offers these bonds not 

only to banks in Kansas but to banks in many other 

states (http://wescofinancial.com). 

In addition, excess deposit insurance continues to be 

provided to state-chartered cooperatives and savings 

banks in Massachusetts by the Share Insurance Fund of 

the Co-Operative Central Bank (SIF) for cooperative 

banks and the Depositors Insurance Fund (DIF) for 

savings banks. The SIF and DIF are private, industryowned excess deposit insurance funds, and both are 

backed solely by their own assets. Neither the Commonwealth of Massachusetts nor the U.S. government 

has any liability for these funds’ obligations. Both 

funds insure deposits above the FDIC limit, in full, 

dollar for dollar, without restriction 

(http://coopcentralbank.com or http://difxs.com). 

Technological Advances 

Recent technological advances have changed the 

banking environment by giving customers options for 

depositing their money and protecting their deposits, 

reducing the need for excess deposit insurance. No 

longer must depositors physically visit a depository 

institution to do their banking. Depositors can shop for 

financial services and conduct banking business 

through the Internet. Rates and terms for deposit 

accounts offered locally and nationwide are available 

through commercial listing services, such as 

Bankrate.com (http://www.bankratemonitor.com).4 

The FDIC also has developed a Web-based application 

(http://www2.fdic.gov/edie) that provides information 

to depositors about how to keep more than $100,000 

fully insured within one financial institution, using different categories of account ownership. 

Recent Private Sector Product Developments 

Products developed by the private sector have reduced 

the demand for excess coverage. Two of these initiatives have become particularly popular: deposit-place4 The FDIC provides tips for safe banking over the Internet at 

http://www.fdic.gov/bank/individual/online/safe.html, and maintains an 

online database where consumers can confirm that an institution is 

FDIC-insured (http://www2.fdic.gov/idasp/main_bankfind.asp). 

ment services and deposit-sweep programs. In depositplacement services, large deposits are split by private 

companies into smaller amounts and distributed to participating banks; as a result, the total deposit is insured 

by the FDIC. In deposit-sweep programs, a depository 

institution “sweeps” demand deposit accounts into 

nondeposit instruments, which may result in the 

avoidance of loss in the event of a bank failure. 

Deposit-Placement Services. Deposit-placement services allow participating banks and thrifts to insure 

deposits that exceed the statutory insurance limit 

while retaining the bank-customer relationship with 

their depositors. To show how a deposit-placement 

service does this, let us assume that a customer deposits 

$500,000 into a participating bank or thrift. The bank 

originating the deposit retains $100,000 in an insured 

account and distributes the remaining $400,000 among 

four other participating institutions, resulting in the 

depositor having full FDIC coverage.5 A deposit-placement service is a form of brokerage in which the risk 

associated with the increased coverage is passed to the 

FDIC. However, risk is minimized as deposits placed 

through this service are considered to be brokered 

deposits, and therefore only well-capitalized institutions can participate.6 

In 2003, the FDIC responded to an inquiry from a 

deposit-placement service as to whether pass-through 

deposit insurance rules apply to funds placed with the 

service. The FDIC responded that deposit insurance 

would “pass through” from the agent (the depositplacement service) to the owner of the funds provided 

that disclosure, record keeping, and other requirements 

were adhered to in the process.7 Deposit-placement 

services became an alternative for customers seeking 

deposit insurance coverage of funds in excess of the 

statutory limit. 

5 This example illustrates a one-way sell transaction. Deposit-placement services also offer reciprocal transactions in which the money 

that is transferred out of the originating bank ($400,000 in our example) is replaced with deposits from other participating institutions 

equaling (in our example) $400,000. As a result of a reciprocating 

transfer, the originating bank maintains its deposit base. 

6 12 U.S.C. § 1831f(a) (2001). An adequately capitalized (but not wellcapitalized) institution may apply to the FDIC for a waiver to accept 

brokered deposits ((12 U.S.C. § 1831f(c) (2001)). 

7 Joseph A. DiNuzzo, “Do ‘Pass Through’ Deposit Insurance Rules 

Apply to Funds Placed in the ‘Certificate of Deposit Account Registry 

Service?’” FDIC Law, Regulations, Related Acts (2003), 

http://www.fdic.gov/regulations/laws/rules/4000-10220.html 

(accessed December 1, 2006). 

FDIC QUARTERLY 31 2007, VOLUME 1, NO. 3 
Deposit-Sweep Programs. Many insured depository 

institutions offer customers the option of “sweeping” 

funds from a deposit account into an alternative 

investment vehicle. In a commercial sweep, the depositor has the option of sweeping funds held in a demand 

deposit into a variety of nondeposit instruments, 

including money market instruments, money market 

mutual funds, Eurodollar accounts, or international 

banking facilities. Commercial sweeps began to be used 

routinely in the 1980s. The primary motivation for 

developing this product was to allow commercial 

demand deposit customers to earn interest on their 

balances, but depositors may also believe their money 

is fully protected in the event of a bank failure. However, for several reasons, most sweeps may not actually 

increase a customer’s chance of recovery if the institution fails. 

Options for Federal Excess Deposit Insurance 

Coverage 

If Congress were to decide that the FDIC should play a 

role in providing excess deposit insurance, the FDIC 

could adopt one of two strategies. First, it could offer 

excess insurance directly to banks on a voluntary basis, 

subject to an additional cost, and either retain the 

additional risk not covered by the participating banks’ 

premiums or purchase reinsurance from a private sector 

reinsurer for the additional coverage. A second 

approach would be to continue to rely on the private 

sector for excess deposit insurance. However, to 

encourage private sector insurers to enter this market, 

the FDIC probably would have to act in some capacity 

as a reinsurer to private sector insurers. 

FDIC Provision of Excess Deposit Insurance: 

Key Issues 

The FDIC has considered how it might provide 

voluntary excess deposit insurance. Issues yet to be 

resolved include the availability of excess insurance, 

limits to the excess coverage to protect taxpayers and 

the insurance fund, and a price for the excess coverage. 

Congressional authorization would be required for the 

FDIC to play any role in providing excess voluntary 

deposit insurance. 

Availability. The FDIC might limit the availability of 

excess deposit coverage to well-capitalized and wellmanaged institutions. For instance, it might institute 

term policies that would be cancelled if the institution 

failed to meet requisite capital standards or if the 

institution’s CAMELS (capital adequacy, asset quality, 

management, earnings, liquidity and sensitivity to 

market risk) rating declined. A means of informing 

depositors about this change in status would need to be 

established to ensure that depositors received prompt 

and adequate notice. 

Caps or Co-insurance. The FDIC might place a limit, 

or cap, on the amount of excess coverage it would 

insure. In addition, the depositor might share in any 

losses on the excess deposit. For example, only 80 

percent of the excess deposit might be insured up to 

the designated cap. Of course, current law affects the 

recovery of excess (uninsured) deposits. First, after 

1993 and the enactment of national depositor 

preference, uninsured depositors share pro rata with the 

FDIC in the liquidation of the failed bank.8 As a 

result, if only part of an excess deposit is insured in a 

system using caps or co-insurance, depositors may not 

receive more coverage than they would under the 

current system, although excess coverage would give 

depositors the certainty of at least a minimum 

recovery.9 Second, the FDIC Board may authorize the 

payment of advance dividends to uninsured depositors 

soon after a bank’s closing. Advance dividends are 

based on an estimated recovery of the bank’s assets and 

provide excess depositors an earlier return on the 

uninsured portion of their deposits.10 

Pricing. A decision would need to be made as to 

whether participating institutions would pay a uniform 

premium. One possibility might be to assess a 

surcharge for accounts over the insurance limit on an 

increasing scale; that is, a higher premium per dollar of 

excess coverage. Another approach could be to assess a 

lower premium on the excess based on an institution’s 

asset mix. 

8 12 U.S.C. § 1821(d)(11) (2001). 

9 This outcome would depend on the percentage of the excess 

deposit insured and the rate of return on assets to uninsured depositors at a given failed institution. 

10 Federal Deposit Insurance Corporation (FDIC), Managing the Crisis: 

The FDIC and RTC Experience, 1980–1994 (Washington, DC: FDIC, 

1998): p. 249. 

FDIC QUARTERLY 32 2007, VOLUME 1, NO. 3 
Establishing Voluntary Excess Deposit Insurance 

FDIC Provision of Excess Deposit Insurance: 

The Role of Reinsurance 

The FDIC might guarantee its exposure in excess of 

the statutory limit with a private sector reinsurer. The 

FDIC would continue to provide deposit insurance 

coverage up to the statutory limit, but its risk on the 

excess could be transferred to a competitive market of 

private reinsurers. 

The FDIC explored the feasibility of establishing a private reinsurance system for deposit insurance in 

2001.11 (The study focused on reinsurance of the 

FDIC’s primary deposit insurance, not excess deposit 

insurance, but the findings are relevant here.) The 

Marsh & McLennan study found that reinsurers had 

only limited interest in engaging in reinsurance agreements with the FDIC on terms acceptable to the Corporation. Some reinsurers wished to limit their risk by 

either reinsuring only the strongest banks or charging 

prohibitively high premiums to banks which they 

determined to be involved in high-risk activities. 

Specifically, the Marsh & McLennan study reached 

the following conclusions: 

The capacity of the reinsurance market could 

theoretically exceed $5 billion.12 However, that 

capacity would be available only if all the major 

insurance companies or reinsurance companies 

participated and only for transactions that had a 

very low probability of loss. 

Reinsurance companies would operate to their 

maximum capacity only if the FDIC paid a very 

substantial first loss. Even if the FDIC took the first 

losses, reinsurers would provide maximum capacity 

only when the transaction was rated the equivalent 

of Aa/AA or Aaa/AAA. Multiline insurers 

expressed interest in higher-risk transactions 

(lower-risk transactions would not generate 

premiums sufficient to support underwriting costs), 

but the capacity of this segment of the market was 

limited—between $200 million and $500 million. 

11 The FDIC engaged Marsh & McLennan to evaluate the feasibility of 

private sector reinsurance arrangements, specifically whether such 

arrangements could provide competitive-market pricing information 

that would assist the FDIC in setting deposit insurance premiums and 

in measuring risks to the deposit insurance funds. The final report 

was completed in December 2001. See Marsh & McLennan Companies, Reinsurance Feasibility Study (Washington D.C.: FDIC 2001). 12 Figures are not inflation adjusted. 

Reinsurers were not interested in sharing losses 

with the FDIC on a proportional basis, even if they 

received a proportional share of any premiums. 

Reinsurance companies advised the FDIC that if 

losses were shared on a proportional basis, their 

capacity would not exceed $100 million. 

Existing transactions would affect a reinsurance 

company’s decision to participate in other 

transactions. If a reinsurer had an existing credit 

exposure with a particular bank—in the form of 

bank debt, credit default swaps, or insurance, for 

instance—the reinsurer would likely limit any 

further transactions with that client. For this 

reason, most reinsurers would prefer a transaction 

that excluded, or substantially limited, coverage of 

the 100 to 150 largest banks. 

Reinsurers generally preferred not to be exposed to 

losses from the failure of any single large bank. 

Reinsurers would be more likely to participate if 

transactions were bundled and structured with a 

three- to five-year term because reinsurers felt 

better able to evaluate risk on a portfolio basis than 

on an individual bank-by-bank pricing basis. 

Similarly, reinsurers were uncomfortable assessing 

risk beyond a five-year horizon. 

Reinsurers’ pricing of the FDIC’s risk would be a 

function of many factors, including the risk of the 

transaction, reinsurers’ cost of capital, reinsurers’ 

expense and profit provisions, and supply and 

demand. Reinsurers’ prices would represent a free 

market charge without government support and, as 

such, could be expected to exceed prices that the 

FDIC would charge for the same portion of 

coverage.13 

Privately Underwritten Excess Deposit 

Insurance 

As mentioned earlier in this article, a small number of 

private secondary insurers currently provide coverage 

for excess deposits with either the bank or the depositor purchasing the coverage. However, most banks and 

depositors have not taken advantage of these services. 

As suggested by the results of the Marsh & McLennan 

study, for privately underwritten excess deposit insurance to be more attractive to potential providers and 

customers, the FDIC likely would have to assume some 

13 Marsh & McLennan Companies (2001). 

FDIC QUARTERLY 33 2007, VOLUME 1, NO. 3 
Authors: 

of the risk. The small number of private businesses currently offering excess deposit insurance reinforces the 

hypothesis that some public loss-sharing arrangement 

is necessary to invigorate this market. 

FDIC Loss-Sharing Protocol. If the FDIC were to act 

as a reinsurer of privately underwritten excess deposit 

insurance, it would need to determine how much risk 

it would assume. The most critical issue would be the 

interplay between the amount of risk the FDIC would 

retain in such a program and the pricing of excess 

coverage. The FDIC’s share of risk could be minimal— 

perhaps, in the extreme, as little as 1 percent of anticipated expected losses—but that retained component 

would have to protect the private insurers from 

extreme events. 

Summary 

A return to stability and prosperity for the banking 

industry has weakened demand for excess deposit 

insurance. In addition, technological advances and private sector initiatives have changed the banking environment and provided depositors with many options 

for protecting their deposits in excess of the statutory 

limit. Banks and depositors currently can purchase private excess deposit insurance from a limited number of 

providers, and new banking products and services— 

deposit-placement services and deposit-sweep programs—are alternatives to FDIC-provided excess 

deposit insurance. 

If Congress were to decide that FDIC-provided excess 

insurance was appropriate, the FDIC would need to 

resolve availability, co-insurance, and pricing issues. It 

also would have to decide whether to retain the risk of 

the additional insurance or reinsure this exposure with 

private sector insurers. Alternatively, excess deposit 

insurance could be provided directly by private sector 

firms. However, depending on its scope, the price of 

privately provided excess deposit insurance likely 

would be prohibitive without an FDIC loss-sharing 

protocol. Private sector interest in providing excess 

deposit insurance, as reinsurers of FDIC exposure or as 

direct providers of excess deposit insurance, appears 

limited. 

Authors: Christine M. Bradley 

Senior Policy Analyst, cbradley@fdic.gov 

Valentine V. Craig, CFA, 

Sr. Program Analyst, mcraig@fdic.gov 

The authors would like to thank Warren Heller 

of the FDIC Division of Insurance and Research 

and Alicia Amiel of the FDIC Library for their 

assistance in writing this article. 

FDIC QUARTERLY 34 2007, VOLUME 1, NO. 3 
Establishing Voluntary Excess Deposit Insurance 

REFERENCES 

Bradley, Christine and Valentine V. Craig. 2007. Privatizing Deposit Insurance: Results of the 2006 

FDIC Study. FDIC Quarterly, Volume 1, Number 2. 

DiNuzzo, Joseph A. 2003. Do “Pass Through” Deposit Insurance Rules Apply to Funds Placed in 

the “Certificate of Deposit Account Registry Service?” FDIC Law, Regulations, Related 

Acts. http://www.fdic.gov/regulations/laws/rules/4000-10220.html (accessed December 1, 

2006). 

Federal Deposit Insurance Corporation (FDIC). 1998. Managing the Crisis: The FDIC and RTC 

Experience, 1980–1994, p. 249. 

Marsh & McLennan Companies. 2001. Reinsurance Feasibility Study. Federal Deposit Insurance 

Corporation. 

Wexler, Celia Viggo. 1996. For Private Deposit Insurers, The Windfall Never Came. The American 

Banker. July 10: p. 3. 

FDIC QUARTERLY 35 2007, VOLUME 1, NO. 3