2023 Options for Deposit Insurance Reform | 55 

Section 7: Conclusion 

Deposit insurance reform merits consideration in 

the wake of bank runs in March 2023 and trends that 

may have increased the susceptibility of the system 

more broadly. This report assesses three options for 

deposit insurance reform, their efficacies to meet 

the objectives of deposit insurance in the current 

environment, their broader consequences, and tools 

that may be used along with each option to maximize 

their effectiveness. The primary options—ordered for 

expositional purposes only—are: 

y Limited Coverage, maintaining the current system 

of deposit insurance and potentially increasing the 

deposit insurance limit; 

y Unlimited Coverage, fully insuring all deposits; and 

y Targeted Coverage, substantially increasing 

coverage to business payment accounts without 

significantly changing the limit for other deposits. 

Financial stability is a primary objective of deposit 

insurance. Banks issue demandable deposits to fund 

long-term assets. When depositors withdraw their 

funds simultaneously, a bank may be forced to sell 

assets at a loss, leading to the bank’s failure. One 

bank’s failure may lead to contagion if depositors 

at other banks fear for their banks’ solvency and 

withdraw funds, resulting in cascading bank failures. 

Depositors who lose access to their funds in bank 

failures may be unable to pay bills coming due, 

resulting in financial stress to firms and households 

and depressing credit and economic activity. Deposit 

insurance reduces these risks. 

In addition to financial stability, deposit insurance 

objectives include depositor protection, consistency 

and transparency, and minimization of disruptions 

from bank resolution. Protecting small depositors has 

been an objective of the deposit insurance system 

since its founding, and more than 99 percent of 

deposit accounts were under the deposit insurance 

limit as of December 2022. Finally, deposit insurance 

coverage affects the ability of the FDIC to resolve 

institutions efficiently. Thus, objectives of deposit 

insurance reform include the minimization of 

disruptions associated with resolution. 

Deposit insurance is associated with other 

consequences for the banking and financial system 

beyond its objectives. Because deposit insurance 

protects depositors from the consequences of bank 

risk-taking, they are less likely to withdraw their funds 

from a bank with poor risk management, allowing 

risks to build up in the system. However, other 

creditors and shareholders may continue to play an 

important role in constraining bank risk-taking in the 

presence of deposit insurance. Deposit insurance can 

also affect competition between banks, competition 

between banks and nonbanks, markets for deposit 

substitute products, and bank funding choices. 

Although some consequences are not inherently 

problematic, the implications should be understood 

in the context of deposit insurance reform decisions. 

In addition, increases to deposit insurance coverage 

affect the adequacy of the DIF and would require 

increased assessments to the banking industry. 

Existing and new tools can complement deposit 

insurance reform to maximize its effectiveness in 

meeting its objectives and minimizing consequences 

deemed undesirable. Bank safety-and-soundness 

regulation and supervision can, in principle, constrain 

bank risk-taking and reduce the likelihood of 

uninsured depositor runs. Deposit insurance pricing 

promotes Fund adequacy and the fair allocation of 

the cost of deposit insurance across banks; to some 

extent, it also influences bank risk-taking. Requiring 

collateralization of large, uninsured depositors may 

reduce run incentives and promote monitoring. 

Limiting the convertibility of large, uninsured deposits 

may also reduce bank runs. Each tool has strengths 

and weaknesses. 
56 | 2023 Options for Deposit Insurance Reform 

This report indicates that Targeted Coverage— 

significantly increasing deposit insurance coverage to 

business payment accounts—is the most promising 

option to improve financial stability relative to its 

effects on bank risk-taking, bank funding, and broader 

markets. There are significant unresolved practical 

challenges to Targeted Coverage, however, including 

defining accounts for additional coverage and 

preventing depositors and banks from circumventing 

differences in coverage. Of the options considered, 

Unlimited Coverage provides the clearest solution 

to bank runs, at the expense of more significant 

implications for Fund adequacy and market 

disruptions, and the greatest potential of the options 

for increases in bank risk-taking. Limited Coverage fails 

to address the financial stability challenges associated 

with large concentrations of uninsured deposits but 

has the fewest implications for bank risk-taking and 

broader market disruptions. This report argues that 

Limited Coverage and Targeted Coverage may also 

benefit from simplification of the deposit insurance 

system but are unlikely to benefit from a voluntary 

excess deposit insurance system. The options and 

tools in this report may inform policies that can help 

the deposit insurance system best meet its objectives 

in the context of the current challenges.