2023 Options for Deposit Insurance Reform | 1

Section 1: Executive Summary

The Federal Deposit Insurance Corporation was 

established in 1933 in response to widespread bank 

runs and bank failures that inflicted severe damage 

on the U.S. economy. Although many banks have 

failed since then, all insured deposits have been fully 

protected by the FDIC.

Trends in uninsured deposits have increased the 

exposure of the banking system to bank runs. At its 

peak in 2021, the proportion of uninsured deposits in 

the banking system was 46.6 percent, higher than at 

any time since 1949. Uninsured deposits are held in a 

small share of accounts but can be a large proportion 

of banks’ funding, particularly among the largest 

10 percent and largest 1 percent of banks by asset 

size. Large concentrations of uninsured deposits, or 

other short-term demandable liabilities, increase the 

potential for bank runs and can threaten financial 

stability. Uninsured depositor runs triggered the 

failures of Silicon Valley Bank and Signature Bank in 

March 2023, respectively the second and third largest 

bank failures in the FDIC’s history at the time. 

Technological changes may increase the risk of 

bank runs. The speed with which information, or 

misinformation, is disseminated and the speed with 

which depositors can withdraw funds in response 

to information may contribute to faster, and more 

costly, bank runs. The spread of information and the 

ability of depositors to transfer funds overnight and on 

weekends may make it more challenging to promptly 

intervene in a bank run.

A primary objective of deposit insurance is to 

promote financial stability. By issuing demandable 

deposits and lending long term, banks are subject to 

runs. When there is a bank run, a bank may be forced 

to liquidate assets inefficiently. The bank may need 

to be sold on short notice, reducing its valuation 

and increasing resolution costs. A bank run may also 

lead to contagion, as demandable liability holders at 

similarly situated banks withdraw their funds, leading 

to increased stress in the banking system. Depositors 

who lose access to their funds in bank failures may 

be unable to meet obligations coming due, resulting 

in financial stress to firms and households. Deposit 

insurance reduces these risks.

Protecting small depositors, who hold most of 

the deposit accounts, has been an objective of the 

deposit insurance system since its founding. As of 

December 2022, more than 99 percent of deposit 

accounts were under the $250,000 deposit insurance 

limit. Monitoring bank solvency involves fixed costs, 

making it both impractical and inefficient for small 

depositors to conduct due diligence. Monitoring 

banks is also time consuming and requires financial, 

regulatory, and legal expertise that cannot be expected 

of small depositors. Deposit insurance protects small 

depositors’ savings, without these undue costs and 

burdens. 

Deposit insurance can result in moral hazard and 

can increase bank risk-taking. Moral hazard is the 

incentive to take on greater risk as a result of being 

protected from the consequences of risk-taking. 

Since insured depositors face no risk of loss and little 

incentive to withdraw funds, risks and embedded 

losses can sometimes build over time at banks funded 

largely by insured deposits. Therefore, changes to 

deposit insurance must consider both the financial 

stability benefits of more coverage and the possible 

implications for risk-taking in the banking system.

Regulation and supervision are essential for helping 

the deposit insurance system meet its objectives 

and constrain moral hazard. Tools such as capital 

requirements and supervision of bank growth 

can reduce moral hazard that arises from deposit 

insurance. Meanwhile, liquidity regulation and interest 

rate risk regulation and supervision can complement 

deposit insurance to reduce run risk. Expansion of 
2 | 2023 Options for Deposit Insurance Reform

long-term debt requirements may both increase 

financial stability by facilitating bank resolution and 

reduce moral hazard by increasing market discipline 

from debtholders. 

Bank runs are a costly form of market discipline 

to mitigate moral hazard. Bank runs by uninsured 

depositors transfer losses to the FDIC and other 

market participants, increase risk to the system by 

preventing an orderly resolution of the bank, and can 

increase risk to stakeholders at other banks through 

contagion. Still, deposit withdrawals can force the 

closure of banks with unsafe business practices not 

otherwise addressed. The threat of bank runs may also 

deter bank risk-taking if bank management perceives 

that the risk of a run threatens bank franchise value. 

Forms of market discipline that similarly constrain 

bank management, but not through runs, are 

preferable from a financial stability perspective.

Even with deposit insurance, non-deposit creditors 

and shareholders may still constrain bank risktaking. However, deposit insurance may reduce the 

cost of deposit funding and so reduce bank incentives 

to raise non-deposit funding. Policies that promote 

reliance on other market participants to constrain 

bank risk-taking can dampen moral hazard concerns 

related to deposit insurance. 

Deposit insurance has broader market effects.

Banks compete for deposits on several dimensions. 

As deposit insurance increases, deposits become a 

relatively more attractive asset. In addition, as deposit 

insurance coverage increases, demand for deposits 

may rise, leading to a decline in deposit interest rates 

and an increase in bank reliance on deposit funding. 

Understanding the broader market implications of 

changes to deposit insurance is important for any 

policy decision.

Deposit insurance is not free and must be funded 

through assessments on the banking system. 

Although the challenges posed by concentrations 

of uninsured depositors in the system are driven 

primarily by a small subset of depositors at a subset 

of banks, increases to the deposit insurance limit 

increase the size of the Deposit Insurance Fund (DIF, or 

the Fund) necessary for a given target ratio of the Fund 

to insured deposits. Increasing the size of the Fund 

must be done through increased assessments 

on banks.

Additional policies can support deposit insurance 

objectives and mitigate undesired consequences.

Deposit insurance pricing is a tool that promotes fund 

adequacy, encourages the fair allocation of the cost of 

deposit insurance across banks and, to some extent, 

influences bank risk-taking. Requiring collateralization 

of large uninsured deposits may also be considered an 

option to limit bank reliance on uninsured deposits, 

reduce depositor run incentives, and increase 

depositor discipline. Limiting the convertibility of 

large uninsured deposits would restrict the capacity 

of depositors to run and may improve depositor 

discipline in a manner that does not threaten financial 

stability. 

This report evaluates three options to reform the 

deposit insurance system. Ordered only for clarity 

of discussion, Limited Coverage maintains the 

current structure of deposit insurance in which 

there is a finite deposit insurance limit that applies 

across depositors and types of accounts. Limited 

Coverage includes the possibility of an increased, 

but finite, deposit insurance limit. Unlimited 

Coverage provides unlimited deposit insurance. 

Targeted Coverage allows for different levels of 

deposit insurance coverage across different types of 

accounts and focuses on higher coverage for business 

payment accounts. Targeted Coverage includes the 

possibility that some account types receive unlimited 

coverage, while others do not. Although each option 

has strengths and weaknesses, Targeted Coverage 

captures many of the financial stability benefits of 

expanded coverage while mitigating many of the 

undesirable consequences.

Each option should be viewed alongside other 

policy changes. Because each of the options has 

relative strengths and weaknesses, their effectiveness 

depends upon the extent to which other policies are 

pursued simultaneously. Regulation and supervision 

and deposit insurance pricing can be used to 

support financial stability objectives and mitigate 

consequences. In addition, limiting the convertibility 

of large uninsured deposits, requiring collateralization 
2023 Options for Deposit Insurance Reform | 3

of large uninsured deposits, simplifying deposit 

insurance, or providing excess deposit insurance 

may be considered alongside Limited Coverage and 

Targeted Coverage options.

Limited Coverage maintains the current system of 

deposit insurance and does not, by itself, address 

the run risk associated with high concentrations 

of uninsured deposits, even with an increase to 

the deposit insurance limit. Increasing the limit by 

an order of magnitude (for example, to millions of 

dollars) is insufficient to cover many of the largest 

uninsured deposit accounts, the sudden withdrawal 

of which may be sufficient to destabilize segments of 

the banking system. Therefore, achieving financial 

stability goals in a system with large quantities of 

uninsured demandable deposits should be pursued 

alongside other tools that limit bank reliance on 

uninsured demandable deposits, reduce the incentive 

of uninsured depositors to run, or reduce the ability 

of uninsured depositors to run. Small and mediumsize businesses that hold deposits at ranges modestly 

above the current limit may benefit from an increase 

to the deposit insurance limit. Absent an increase in 

the limit by multiple orders of magnitude, the overall 

effects on other markets and the adequacy of the DIF 

are likely to be small.

Unlimited Coverage—fully insuring all deposits—

effectively removes run risks but may have large 

effects on bank risk-taking, the level of deposit 

insurance assessments on banks, and broader 

financial markets. Insurance backed by the federal 

government provides the best deterrent to run risk. 

However, full deposit insurance may also generate 

large inflows of deposit funding to banks. It also would 

remove depositor discipline and may induce excessive 

risk-taking by banks. In addition, full deposit insurance 

may lead to significant disruptions for asset markets 

for which deposits are a substitute. Other tools, such 

as regulation, supervision, and pricing, may be used 

along with insurance to reduce disruptions to other 

asset markets and to dampen increased moral hazard. 

Full deposit insurance would increase the size of the 

DIF needed to achieve any given ratio of the DIF to 

insured deposits by about 70 to 80 percent, ignoring 

possible inflows of deposits, leading to significantly 

higher assessments on banks. 

Targeted Coverage would provide substantial 

additional coverage to business payment accounts 

without extending similar insurance to all deposits, 

yielding large financial stability benefits relative 

to its costs. A challenge to Targeted Coverage is 

the need to delineate between business payment 

deposits and other deposits. Extending deposit 

insurance to business payment accounts may have 

relatively large financial stability benefits, with fewer 

costs to moral hazard relative to increasing the limit 

for all accounts, as in the other options. It is difficult 

for businesses to maintain payment accounts across 

multiple banks to obtain increased deposit insurance 

coverage. Payment accounts rarely involve weighing 

a risk-return tradeoff typical of investments that form 

the basis of desirable market discipline. Further, losses 

on business payment accounts are most likely to 

spill over to payroll and other businesses. However, 

significant challenges in Targeted Coverage are 

distinguishing accounts that merit higher coverage 

from those that do not and limiting the ability of 

depositors and banks to circumvent those distinctions. 

Extending considerably higher deposit insurance to 

business payment accounts may require a significant 

increase in assessments.

Overview: This report highlights the limitations of the 

current deposit insurance system to achieve financial 

stability objectives in an environment with large 

quantities of uninsured deposits and policy options 

that may be considered to help the deposit insurance 

system meet those objectives. Table 1.1 provides 

a summary of the advantages and disadvantages 

of the options along with complementary tools 

for consideration. Section 2 discusses the events 

of March 2023 and broader industry trends that 

give rise to financial stability concerns. Section 3 

provides a brief history of changes to the U.S. deposit 

insurance system. Section 4 outlines the objectives 

and consequences of deposit insurance. Section 5 

discusses tools that may be used in conjunction with 

deposit insurance to achieve policy objectives. Section 

6 discusses options and considerations for reform to 

the deposit insurance system. Section 7 concludes.
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TABLE 1.1

Summary of Advantages and Disadvantages of the Options for Deposit Insurance Reform

Advantages Disadvantages Potential Complementary Tools

Limited Coverage • Best tested model of deposit 

insurance 

• Results in a limited effect on 

moral hazard

• Has a limited effect on Deposit 

Insurance Fund (DIF) adequacy

• Creates limited disruption in 

other markets

• Raises financial stability concerns 

from uninsured deposits at risk

• Consider liquidity regulations 

that reduce reliance on uninsured 

deposits

• Incorporate additional liquidity 

risk measures into pricing

• Place limits on convertibility for 

large deposits

• Implement deposit insurance 

simplification coupled with an 

increase in coverage to address 

transparency concerns and 

complexity

• Consider long-term subordinated 

debt requirement to facilitate 

resolution

Unlimited Coverage • Largely eliminates bank runs

• Enhances transparency—clear 

understanding of insurance status 

for depositors

• Simplifies resolution process

• Eliminates depositor discipline; 

burden of market discipline falls 

to debtholders and stockholders

• Potentially broader market 

disruptions 

• Generates large effects on DIF and 

increased assessments

• Consider long-term subordinated 

debt requirements and capital 

requirements to mitigate moral 

hazard

• Consider regulation that limits 

reliance on deposits

• Consider interest rate restrictions

Targeted Coverage • Targets coverage to meet ongoing 

payment and operational needs 

of businesses

• Increases financial stability, 

depending on the increase in 

coverage

• Results in a limited decrease in 

depositor discipline depending on 

types of accounts covered

• Previous experience (Transaction 

Account Guarantee Program)

• Challenging to define type of 

accounts, risk of regulatory 

arbitrage

• Decrease in transparency due to 

complexity

• Increases complexity of 

resolutions

• Requires additional DIF funding

• Consider interest rate restrictions 

on accounts for which additional 

coverage is extended

• Consider simplification of 

ownership categories to decrease 

complexity

• If large accounts remain partially 

insured, require that large 

deposits are secured

• If large accounts remain 

partially insured, place limits on 

convertibility for large deposits