2023 Options for Deposit Insurance Reform | 41 

Section 6: Options for Increased 

Deposit Insurance Coverage 

This section presents several options for alternative 

deposit insurance schemes. The options differ in how 

much they deviate from the statutory status quo and in 

their likely effects upon deposit insurance objectives. 

Of the options considered, the report suggests 

that Targeted Coverage, which allows for higher 

or unlimited deposit insurance limits for business 

payment accounts, has the greatest potential to 

meet many of the objectives of the deposit insurance 

system while mitigating many of the undesirable 

consequences of raising the limit more broadly. 

Limited Coverage maintains the existing deposit 

insurance framework that insures all depositors up 

to a limit by ownership rights and capacities at the 

current limit or a higher limit. Given its long history, 

Limited Coverage is the best tested model of deposit 

insurance. However, Limited Coverage does little to 

address the financial stability concerns associated 

with the events of March 2023 and the broader trends 

in the banking system. 

Unlimited Coverage provides unlimited deposit 

insurance for all deposits. Although Unlimited 

Coverage likely provides the greatest financial 

stability benefits of the options considered, it is also 

a significant departure from the existing system. In 

addition to its possible effects on bank risk-taking, 

Unlimited Coverage may cause significant disruptions 

to other asset markets and would require a substantial 

increase in assessments on the industry to support the 

adequacy of the DIF. 

Targeted Coverage considers different coverage across 

account types, with a focus on providing significantly 

higher or unlimited coverage to business payment 

accounts. Because losses on uninsured deposits 

associated with business payments are most likely 

to create spillovers, providing higher coverage on 

these deposits increases financial stability without 

expanding the safety net more broadly. Relative to 

investment accounts, business payment accounts 

are less likely to seek yield and are more difficult 

to diversify across banks in the current system to 

obtain full deposit insurance. The major limitations to 

Targeted Coverage are identifying business payment 

accounts subject to a higher deposit insurance limit 

and restricting the ability of depositors to exploit 

coverage differentials. Although more analysis is 

warranted, Targeted Coverage provides significantly 

greater financial stability benefits than Limited 

Coverage while attenuating many of the drawbacks 

associated with Unlimited Coverage. 

This section also explores additional options that 

may be considered alongside Limited Coverage and 

Targeted Coverage in which some depositors remain 

uninsured. The section reviews voluntary excess 

deposit insurance, in which individual banks or 

depositors may choose to insure above the deposit 

insurance limit. If large concentrations of uninsured 

deposits remain under Limited Coverage or Targeted 

Coverage, additional approaches could include 

requiring collateralization of large, uninsured deposits 

or limiting their convertibility. 

Limited Coverage 

An option for deposit insurance reform is to maintain 

the current deposit insurance framework that provides 

insurance to depositors up to a specified limit by 

ownership rights and capacities as discussed in 

Section 3. Although retaining the status quo deposit 

insurance coverage limits, increasing limits but 

maintaining them at finite levels, or simplifying the 

deposit insurance system while maintaining limited 

coverage are technically different deposit insurance 

structures, many of the fundamental effects of such 

proposals on the objectives and consequences of 

deposit insurance are similar. A change to the deposit 

insurance coverage limit could be of any magnitude— 

to $500,000, $1 million, $2.5 million, or $10 million, 
42 | 2023 Options for Deposit Insurance Reform 

for example.126 While the benefits and costs of raising 

the limit vary, the variation is differences in degree 

not kind. This report does not consider any precise, 

finite coverage limit and evaluates as one any reform 

options that maintain the existing deposit insurance 

framework in which nontrivial amounts of all deposit 

products are explicitly uninsured. 

The existing limited coverage deposit insurance 

framework is the best tested model of deposit 

insurance. It has been used in the United States since 

the founding of the FDIC and is in place in many 

other countries as well. Maintaining this framework 

minimizes transition costs and potential broader 

market disruptions associated with larger departures 

from the status quo. 

The costs of a deposit insurance determination 

associated with Limited Coverage are the same as 

those in the current system, which can be significant, 

and relate to financial stability. Consequently, in 

an option with limited, but an increased, deposit 

insurance coverage limit, simplification merits 

consideration. The FDI Act provides depositors 

with separate deposit insurance coverage at each 

chartered institution where they hold deposits. The 

deposit insurance coverage limit is applied to deposit 

amounts aggregated by different ownership rights 

and capacities (known as ownership categories) 

at the same institution.127 Simplification can also 

complement the Targeted Coverage option, which is 

discussed below. 

As of May 2023, there are 14 ownership categories 

that are covered separately by deposit insurance up 

to the standard maximum deposit insurance amount 

of $250,000 per institution.128 Multiple ownership 

categories complicate the resolution process, 

potentially delay payments to insured depositors, 

and add uncertainty to the FDIC’s ability to provide 

liquidity to uninsured depositors through an advance 

dividend. Reducing the number of categories or 

limiting deposit insurance to a unique depositor 

identifier (such as a social security number or tax 

identification number) would reduce some of the 

challenges of resolution. However, a reduction or 

elimination in the number of deposit insurance 

categories reduces the effective deposit insurance 

limit available to a depositor with accounts in multiple 

categories. 

Simplification may also contribute to depositor 

protection by reducing barriers to understanding 

deposit insurance coverage and by reducing 

asymmetries across depositors based upon their 

financial, legal, and regulatory knowledge. Clarity on 

deposit insurance coverage can then help depositors 

make informed decisions about their deposit choices. 

Clearer information may further financial stability, as 

uncertainty about insurance coverage in the event of a 

bank run is likely to lead depositors to withdraw their 

funds, even when their accounts may be fully covered. 

Financial Stability 

As the events of March 2023 revealed, financial 

stability under the current deposit insurance 

framework can be improved. Bank runs at Silicon 

Valley Bank and Signature were reminiscent of runs 

that occurred before the FDIC’s creation. Further, 

market perceptions of protection of uninsured 

depositors may have changed following the invocation 

of the systemic risk exception in March 2023 amid 

126Expressed as a percentage of per capita GDP, U.S. deposit insurance coverage is the most comprehensive of any G7 peer and among the highest of the G20 

countries. Current U.S. deposit insurance coverage also exceeds substantially both the current median IADI (International Association of Deposit Insurers) 

member coverage and IADI historical average. Using information from the IADI Annual Deposit Insurance Survey of 2022 on coverage levels and the IMF World 

Economic Outlook, October 2022, for GDP, the average coverage limit of members of the Financial Stability Board is $75,367 and the average coverage to per 

capita GDP is 193.5 percent. In the United States, the current coverage level of $250,000 is 328 percent of U.S. per capita GDP. This is the sixth largest number of 

all of the countries who are part of the Financial Stability Board, and the largest of all of the G7 countries. See https://www.iadi.org/en/research/data-warehouse/ 

deposit-insurance-surveys/. 

127See 12 U.S.C. § 1821(a)(1)(C). In determining the net amount due to a depositor, the FDIC is required to aggregate all deposits in the insured depository 

institution that are maintained by a depositor “in the same capacity and the same right.” In other words, all deposits that an accountholder has in the same 

ownership category at the same bank are added together and insured up to the standard insurance amount. The United States is one of the few international 

jurisdictions that provide deposit insurance on a per ownership category, rather than per depositor, basis. Depending on the organization of the depositor’s 

accounts, this results in a higher deposit insurance coverage level per depositor than the coverage limit would indicate. 

128The categories are single accounts, certain retirement accounts, joint accounts, revocable trust accounts, irrevocable trust accounts, employee benefit plan 

accounts, corporation/partnership/unincorporated association accounts, government accounts, mortgage servicing accounts, public bond accounts, irrevocable 

trusts accounts with banks as trustee, annuity contract accounts, custodian accounts for Native Americans, and accounts of a bank pursuant to the bank deposit 

financial assistance program of the Department of Energy. For the most common insurance categories, see FDIC, “Your Insured Deposits,” https://www.fdic.gov/ 

resources/deposit-insurance/brochures/insured-deposits/. Note that rules for revocable trusts, irrevocable trusts, and mortgage service accounts will change on 

April 1, 2024. For information on these changes, see “Final Rule on Simplification of Deposit Insurance Rules for Trust and Mortgage Servicing Accounts,” https:// 

www.fdic.gov/news/fact-sheets/final-rule-trust-mortgage-accounts-01-21-22.pdf. 
2023 Options for Deposit Insurance Reform | 43 

concerns about the potential for bank runs at multiple 

regional banks. Uncertainty associated with protection 

of uninsured depositors reduces the transparency and 

consistency of the deposit insurance system. 

Incentives to run are created by the potential loss 

incurred by depositors. Although increases in the 

deposit insurance limit reduce run risk from depositors 

covered by the increase, run risk can be driven 

primarily by a small fraction of depositors who hold 

large concentrations of deposits.129 Even if deposit 

insurance limits increase, run risk to banks holding the 

largest deposits persists. 

The financial stability benefits of the Limited Coverage 

option are strongly related to the amount of the 

increase in the deposit insurance limit. Even with 

a ten-fold increase in deposit insurance, there are 

likely to remain large uninsured deposits that can 

pose financial stability concerns. Because the existing 

framework of limited deposit insurance coverage is 

not expected to meaningfully affect financial stability, 

it is important that this option is considered alongside 

other available tools to improve upon financial 

stability. 

Such tools include reducing the runnable deposits 

in the banking system and discouraging uninsured 

depositors from running during an impending 

failure. To discourage the accumulation of uninsured 

deposits, regulations that specifically target the ratio 

of uninsured deposits to bank assets would directly 

affect the bank’s willingness or ability to accept runsusceptible uninsured deposits. Extending to other 

institutions simplified versions of existing liquidity 

regulations that apply to large institutions may 

also promote financial stability and limit runs. The 

supervisory framework can also play an important 

role in monitoring interest rate risk and subjecting 

banks to enforcement actions if they fail to remediate 

risks associated with unstable funds. Moreover, the 

deposit insurance pricing system could be modified to 

incorporate additional premiums for concentrations of 

uninsured deposits, short-term liabilities, or maturity 

mismatch. More generally, the pricing system could 

better incorporate risks, such as interest rate risk, that 

may be associated with financial stability concerns. 

Explicit collateralization requirements, such as those 

discussed in Secured Deposits later in this section, 

could further lower prospective losses for uninsured 

depositors, decreasing their incentives to run. In 

addition, limiting the full withdrawal capacity of large, 

demandable accounts may be considered to promote 

financial stability when considering limited deposit 

insurance, discussed in Limited Convertibility later in 

this section. 

Moral Hazard, Market Discipline, and Depositor 

Discipline 

Existing levels of depositor discipline, overall market 

discipline, and moral hazard are unlikely to be greatly 

affected by changes to deposit insurance coverage 

limits that maintain the existing deposit insurance 

framework. This is especially the case for coverage 

limit changes that raise the rate by less than several 

orders of magnitude. For example, an increase in 

coverage from $250,000 to $2.5 million would directly 

affect only depositors with accounts in the affected 

range. Among previously uninsured depositors, those 

who become fully insured with a limit increase are 

likely to have been those with the least resources to 

monitor banks and to affect risk-taking incentives, 

though uninsured depositors with multimillion dollar 

balances may be more influential monitors at smaller 

institutions. Overall, the removal of monitoring 

incentives for depositors whose accounts become fully 

insured following a limited coverage change is unlikely 

to significantly affect other market participants and 

bank risk-taking behavior. 

Broader Market Efects 

The competitive effects of increases in coverage 

limits within the existing deposit insurance structure 

are tied to the degree of increase. A given coverage 

increase may affect only a small percentage of 

consumer accounts, but it may apply to a much larger 

share of accounts used by businesses. The effects on 

competing financial products are likely minimal since 

there are few compelling alternatives to transaction 

accounts for business purposes. 

129 In congressional testimony on March 27, 2023, FDIC Chairman Gruenberg noted that the ten largest accounts at SVB held $13.3 billion collectively. See https:// 

www.fdic.gov/news/speeches/2023/spmar2723.html. In addition to the size of the largest ten accounts, the average account above the insurance limit at SVB as 

of December 2022 was more than $4 million. Thus, the incentive of depositors to run at SVB would likely be materially similar whether the deposit insurance limit 

was $250,000 or even ten times that limit. 
44 | 2023 Options for Deposit Insurance Reform 

Consistency and Transparency 

The current deposit insurance framework suffers 

from perceived consistency and transparency issues. 

Deposit insurance coverage reform options that 

maintain greater amounts of the existing framework 

are more likely to perpetuate the existing perceived 

consistency and transparency issues. 

Fund Adequacy 

The effects on Fund adequacy would depend upon 

the extent of changes to the deposit insurance limit. 

Limited information on the volume of deposits at 

alternative thresholds makes it difficult to determine 

the extent to which the DIF would need to increase. 

By number, the vast majority of deposit accounts 

are already insured and to the extent that uninsured 

deposits are heavily concentrated among the largest 

depositors, the less increases in the limit would affect 

the DIF. The anticipated effects to the DIF, therefore, 

are likely modest.130 

Unlimited Coverage 

Extending unlimited deposit insurance coverage to 

all deposits is a second option for deposit insurance 

reform.131 This option would directly and effectively 

address financial stability concerns. Of the options 

considered, however, unlimited deposit insurance is 

likely to have the most dramatic effects on depositor 

discipline and the most likely to have broader market 

implications. It would also have the largest effect 

on the exposure to and adequacy of the DIF. To 

limit undesirable consequences, unlimited deposit 

insurance would need to be paired with other tools, 

and the efficacy of those tools would need to be 

assessed to ensure that they meet policy objectives. 

An additional benefit of Unlimited Coverage is 

that it eliminates the need for a deposit insurance 

determination and simplifies the resolution process. 

Also, as all deposits are insured, there is no need 

to secure deposits or limit their convertibility and 

no basis for voluntary excess deposit insurance. 

Consequently, those options do not apply to Unlimited 

Coverage. 

Financial Stability 

While there are various methods to reduce 

destabilizing bank runs, the most direct way is to 

remove the incentives for depositors to run. These 

incentives are inseparably tied to the degree to which 

depositors are subjected to potential loss in the 

event of a bank failure. The possibility of bank runs 

can be almost fully eliminated by expanding deposit 

insurance to all depositors and deposits. As discussed 

in the next section, however, increased moral hazard 

could increase overall risk in the system and affect 

financial stability. 

Moral Hazard, Depositor Discipline, and 

Market Discipline 

Although unlimited deposit insurance would promote 

financial stability through the decreased propensity for 

bank runs, it also has the potential to exacerbate moral 

hazard problems, as depositors have no incentive to 

evaluate bank risk-taking behavior when placing their 

deposits and minimal incentive to regularly monitor 

bank risk-taking behavior.132 Depositor discipline can 

occur on an ongoing basis to the extent depositors 

monitor and influence bank risk-taking. For such 

depositor discipline to be effective, depositors must 

not only have the incentive to exercise discipline, they 

also need willingness and expertise to evaluate bank 

behavior. Depositor discipline can also occur after the 

fact in the form of bank runs. Depositor discipline in 

the form of bank runs has significant financial stability 

costs, but it also puts an end to problems at a bank 

that may have gone unaddressed. Unlimited deposit 

insurance coverage would for practical purposes put 

an end to both types of depositor discipline. 

130 For example, FDIC (2000) estimated that a doubling of the deposit insurance limit at the time from $100,000 to $200,000 would be associated with an increase 

in insured deposits of $270 billion relative to almost $3 trillion in insured deposits at that time. 

131Proposals for unlimited deposit insurance are not new. Out of the 150 proposals for deposit insurance made in Congress between 1886 and 1933, 80 percent 

called for insurance of all or nearly all deposits (FDIC 1984, pp. 29–30). 

132Unlimited deposit insurance will not eliminate bank failures, and depositors still may suffer inconvenience costs associated with failure. These costs may be a 

reason why insured depositors sometimes run from a bank approaching failure (Davenport and McDill, 2006). A large component of inconvenience costs is likely 

the possibility of restricted access to deposited funds in the event of failure. Without the need to complete an insurance determination and with an adequately 

capitalized deposit insurance fund (or a credible commitment from the Treasury to ensure the FDIC can meet all financial obligations), depositors should not 

experience restricted access to their funds. Since unlimited deposit insurance does not eliminate bank failures entirely, there will still be some inconvenience 

costs associated with depositors needing to find a new bank on a timeline that is outside of their control during a failure. (These costs are borne by depositors 

withdrawing their deposits from a bank, but the timing of when these costs are felt is under the control of the depositor outside of a failure.) Thus, despite being 

greatly reduced through the provision of unlimited deposit insurance, incentives to run will remain. These incentives are likely minimal. 
2023 Options for Deposit Insurance Reform | 45 

Although unlimited deposit insurance removes 

depositor discipline, it need not reduce overall market 

discipline on a bank from non-deposit creditors, such 

as debt holders and stockholders. It is even possible 

that non-deposit creditors would perceive themselves 

to be at increased risk of loss under a system of 

unlimited deposit insurance coverage and have greater 

incentives to exercise discipline. This is because the 

coverage of all depositors, and the operational ease 

of doing so, may make it unlikely that a systemic risk 

determination would be warranted. 

Another consideration is that unlimited deposit 

insurance would likely increase banks’ incentive to 

fund themselves largely with deposits and less with 

uninsured funding sources whose claimants have 

incentives to monitor risk. On balance, an explicit full 

deposit insurance guarantee of all deposits would 

greatly increase banks’ ability to access and rely 

on federally guaranteed funding. With bank runs 

effectively eliminated, the burden on other parts of 

the system of controlling large buildups of bank risk 

would increase. Any underperformance of supervision, 

regulation, deposit insurance pricing, or other risk 

control mechanism such as discussed in Section 

5 would likely have greater cost to the DIF under a 

system of unlimited deposit insurance. 

Existing tools can support Unlimited Coverage by 

mitigating the associated moral hazard concerns. 

For example, increasing capital requirements or 

expanding long-term unsecured debt requirements 

may provide meaningful constraints to moral hazard 

in the absence of depositor discipline with unlimited 

insurance. In addition, moral hazard concerns under 

Unlimited Coverage may be addressed to some 

degree with interest rate restrictions on deposits. 

There is long-standing historical precedent for the use 

of interest rate controls as a tool to constrain bank 

risk-taking, dating to the establishment of federal 

deposit insurance in the United States and the Banking 

Act of 1933, and implemented through Regulation Q 

(discussed in Section 3). Although general interest 

rate restrictions on deposits were gradually removed 

starting with the Depository Institutions Deregulation 

and Monetary Control Act of 1980 and ending with 

the repeal of Regulation Q in 2011, they are still 

used to limit risk-taking incentives of less than wellcapitalized banks under the Financial Institutions, 

Reform, Recovery, and Enforcement Act of 1989. Under 

a significant expansion of the deposit insurance safety 

net, it is worth considering whether interest rate 

restrictions are warranted to mitigate moral hazard 

concerns. 

Broader Market Efects 

The competitive effects from a regime change to 

unlimited deposit insurance are potentially large. 

Deposits exist within a broad range of competing 

financial products. Absent accompanying changes in 

returns, extending deposit insurance coverage to all 

deposits will make deposits more attractive relative to 

other products. This would increase customer demand 

for deposit products and reduce demand for other 

competing assets. To the extent a significant shift 

toward deposits occurs, deposit rates and asset prices 

would adjust to reach a new equilibrium allocation of 

aggregate investment across products. 

Consistency and Transparency 

Explicit insurance coverage of all deposits produces 

a consistent and transparent deposit insurance 

framework. All depositors know with certainty that 

their deposits are safe. Expanding insurance coverage 

to all deposits and depositors minimizes potential 

differences in coverage based on a customer’s ability 

or knowledge about the opportunities for expanded 

coverage, for example, through pass-through 

coverage.133 

Fund Adequacy 

Unlimited deposit insurance coverage would have 

significant implications for the size of the DIF. Before 

accounting for possible deposit inflows, unlimited 

deposit insurance would increase the size of the 

DIF required to achieve a given ratio of the Fund to 

insured deposits by about 70 to 80 percent.134 The 

need to increase the DIF would require that the FDIC 

raise assessments on banks and maintain them at 

levels significantly higher than their current levels. In 

addition, unlimited deposit insurance may warrant 

an adjustment to the designated reserve ratio. FDIC 

losses would be higher in a failure, other things equal, 

because there would be no uninsured depositors 

133An important caveat is that unlimited insurance would apply to domestic deposits, retaining the currently explicit absence of coverage of foreign deposits. 

134As of fourth quarter 2022, the DIF was $125.5 billion, the reserve ratio was 1.27 percent, and estimated insured deposits were $10.1 trillion. To meet the 

minimum reserve ratio of 1.35 percent, the DIF would need to be $136.4 billion. If all of the $17.8 trillion of domestic deposits were insured, everything else equal, 

then the DIF would need to be $240 billion to reach a reserve ratio of 1.35 percent. 
46 | 2023 Options for Deposit Insurance Reform 

to take loss. Failures may be less costly if unlimited 

deposit insurance prevents costly bank runs or more 

costly if it allows risks on bank balance sheets to go 

unaddressed for long periods of time. 

Targeted Coverage 

A third option for deposit insurance reform is to offer 

different deposit insurance coverage across account 

types, or Targeted Coverage. This option may extend 

unlimited coverage to some account types and 

provide limited coverage to others, or it may provide 

limited coverage across all account types but with 

different limits. This option may help target financial 

stability objectives associated with higher or unlimited 

insurance while maintaining depositor discipline and 

mitigating disruptions across markets that compete 

with deposits. Targeted Coverage is analogous to the 

TAG program discussed in Section 3. For this option, 

the qualifying accounts could be analogous to or 

different than those in the original TAG program.135 

The account types that may merit higher coverage are 

those used for payment purposes, specifically business 

payment accounts.136 Conceptually, deposits have two 

distinct purposes: payment services and investment. 

Payment services enable depositors to easily transfer 

monetary value as part of the exchange of goods and 

services. In contrast, the primary purpose of deposits 

used for investment is to provide depositors a store of 

value and a return on investment. While deposits used 

for investment have many substitute products against 

which a depositor can assess a risk-return tradeoff, 

deposits used for payment services have fewer 

substitutes. Further, deposits used for investments 

are not essential to support the daily operations of 

households and businesses: investors regularly incur 

losses to investments without prompting significant 

financial or economic spillovers. In contrast, deposits 

used for payments are essential for businesses and 

households to manage cash inflows and outflows. 

Losses to deposits used for payments—or a delay in 

access to deposit funds—can abruptly debilitate daily 

operations. 

Business payment accounts are not currently 

defined in the structure of the deposit insurance 

system but must be identifiable for the viability of 

Targeted Coverage. Practically, such accounts may 

be measurable by first distinguishing the identifier 

associated with the account: for example, using a tax 

identification number (TIN) or employer identification 

number (EIN) rather than a social security number 

(SSN). In addition, business payment accounts may 

be distinguished from other accounts using account 

features. For example, business payment accounts 

may be defined as those that are demandable and 

do not pay interest (or do not pay interest above 

some benchmark). In addition to creating a practical 

definition to identify business payment accounts, 

delineating between accounts eligible to receive 

higher coverage is a major challenge and discussed 

further below.137 

There is also an argument to differentiate business 

payment accounts from other accounts from an 

efficiency perspective. It is likely that deposit accounts 

used for operational purposes are more difficult to 

maintain across multiple banks to obtain greater 

deposit insurance coverage. There are also likely large 

inefficiencies in managing daily inflows and outflows 

across multiple banks relative to accounts used 

for investment purposes. Thus, business payment 

accounts are least able to take advantage of insurance 

across banks in the current system. 

The main challenges of Targeted Coverage are the 

practical considerations when defining account types 

that receive higher insurance coverage to ensure 

that the criteria for qualifying accounts are strictly 

defined and cannot be easily circumvented, especially 

given recent improvements in financial technology. 

For example, individuals, trusts, or estates may 

135Although not entirely analogous, the European Bank Recovery and Resolution Directive provides differential priority in a resolution between natural persons 

and small businesses. See Article 108(1)(a) of Directive 2014/59/EU at https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-singlerulebook/100804. 

136Similar to accounts in the TAG program, account types meriting higher coverage may be broader than business payment accounts, such as all transaction 

accounts. Broader definitions may be more practical to implement or may serve a broader policy objective to also include households that require large account 

balances for transaction purposes. 

137As a back-of-the-envelope calculation, median monthly income in the United States in fourth quarter 2022 was $4,709 (Bureau of Labor Statistics, not 

seasonally adjusted, weekly income multiplied by 4.34). Defining small businesses as those with less than 500 employees, a deposit insurance limit of $2.5 million 

for accounts with either an EIN or TIN (rather than an SSN) would likely cover payroll for a large proportion of small and medium-size business payment accounts. 

Such a calculation excludes other business expenses, which vary by business type, and ignores variation in monthly earnings. 
2023 Options for Deposit Insurance Reform | 47 

exploit account definitions and adopt EINs or TINs to 

obtain higher coverage under Targeted Coverage. In 

addition, banks and depositors may find other ways to 

circumvent restrictions placed on accounts with higher 

coverage. For instance, a bank may offer accounts with 

no interest but where loyalty “points” can be accrued 

and redeemed for gift cards or even cash. Alternatively, 

or in conjunction, banks could offer lower loan rates 

to customers who have noninterest-bearing accounts. 

Banks will be incentivized to pursue these or other 

innovations to attract deposits. Given the rapid pace 

of financial and technological innovation, it may 

be challenging for regulators to stay ahead of new 

product offerings. 

Alternatively, banks may offer accounts with sweep 

arrangements in which deposits are regularly 

transferred from one type of account into another 

in ways intended to combine the advantages of 

investment-type accounts with the advantage of 

increased coverage of the transaction account. Deposit 

sweep arrangements may complicate failure resolution 

since failing banks may close either during regular 

business hours or at other times. Though banks may 

have to provide formal notice to depositors, depositors 

may not comprehend the implications of sweep 

programs. For example, some depositors may not read 

the relevant disclosure documents, or some may agree 

to sweep programs when opening an account and 

later forget. The increased complexity may cause some 

depositors to believe that they have higher insurance 

coverage in specific accounts when in fact they do not. 

Ultimately, the distinction between accounts with 

higher coverage and other account types should 

be based on criteria that are easily accessible and 

distinguishable between accounts, and that are 

clearly defined and disclosed in ways that depositors 

understand. Since large amounts of uninsured 

deposits may remain in banks under this option, it 

may be appropriate to consider other tools such as 

those in Section 5 to mitigate the risk of banks runs. 

The separation of accounts by function—payments 

and investments—is a key concept of Targeted 

Coverage. Consequently, interest rate restrictions 

(as discussed in Section 3 and in Unlimited Coverage) 

on accounts with higher coverage may be an 

important consideration for implementation of 

Targeted Coverage. Similarly, large deposit accounts 

that are not eligible for higher coverage should have 

clear restrictions on withdrawals to maintain a clear 

separation of payments and investment functions. In 

delineating accounts, it is important that large deposit 

accounts do not simultaneously offer insurance 

coverage, liquidity, and high yield. 

The costs associated with conducting a deposit 

insurance determination associated with Targeted 

Coverage are similar to those for Limited Coverage 

or potentially higher, depending on how accounts 

are identified. For example, accounts receiving 

higher coverage may be viewed as an additional 

ownership right and capacity over which accounts 

must be aggregated before applying the deposit 

insurance coverage limit, which could complicate 

deposit insurance determinations. As discussed in 

Limited Coverage, deposit insurance simplification 

may provide additional benefits when considered in 

tandem with Targeted Coverage. 

Financial Stability 

Providing increased coverage to specific types of 

accounts has several advantages. First, it allows for 

a form of targeting, in which additional insurance 

is provided depending on the needs of customers 

and financial stability objectives, rather than being 

constrained to using only one limit to serve all account 

types. The original TAG program served the needs 

of businesses, nonprofit organizations, government 

municipalities, and other entities that needed ongoing 

use of large deposit amounts (e.g., for payroll).138 

In serving these needs, the original TAG program 

increased financial stability overall and benefited the 

broader economy. 

The primary source of run risk that generates financial 

stability concerns is demandable deposits, especially 

those deposits used for operational purposes. 

Business payment deposits are less easily diversifiable 

across banks, and business accounts in this category 

may become very large. Providing greater or unlimited 

deposit insurance to business payment accounts 

provides the benefits of higher insurance without 

extending the guarantee to large depositors whose 

deposits are used for investment purposes. 

138Depositors excluded from TAG program coverage were primarily those holding higher interest-bearing accounts that appear more similar to investors than 

those using their accounts for ongoing operating expenses. 
48 | 2023 Options for Deposit Insurance Reform 

Increasing coverage to large deposit accounts with the 

most demand for liquidity would reduce or eliminate 

the need for depositors of such accounts to withdraw 

their funds out of fear for the safety of their deposits 

and for the continuity of their operations. This 

would have benefits for financial stability, as these 

depositors are not expected to discipline risk-taking by 

demanding a higher return, but instead have a strong 

incentive to run in response to solvency concerns. 

Large investment-type deposits, which would remain 

uninsured, could still expose banks to risk of runs or 

periods of funding stress if these uninsured funds do 

not roll over when they mature. 

Like Limited Coverage, the financial stability benefits 

of Targeted Coverage relate to the amount of the 

increase in the deposit insurance limit, especially as 

it pertains to demandable accounts. If there remain 

large uninsured demandable accounts, additional 

tools to further promote financial stability should 

be considered. For example, large, partially covered, 

demandable accounts may need to be subject to 

other restrictions (such as collateralization or limits to 

liquidity or a limited draw schedule, discussed later in 

this section) that limit the associated run risk. 

Moral Hazard, Market Discipline, and 

Depositor Discipline 

The primary drawbacks to providing greater or 

unlimited coverage to specific account types are the 

potential loss in depositor discipline and resulting 

implications for bank risk-taking. With respect to 

depositor discipline, operational business depositors 

may be poorly situated to evaluate the risks on their 

bank’s balance sheet relative to investors, since the 

primary focus of the owner of a business payment 

account is running a business. By providing higher 

insurance coverage to these types of accounts, the 

deposit insurance system may reduce inefficiencies 

created by maintaining many business payment 

accounts across banks and benefit those for whom 

financial stability concerns are highest. Interest rate 

restrictions on accounts with higher coverage can 

also mitigate moral hazard concerns from increased 

deposit insurance. 

With Targeted Coverage, one may conjecture that the 

loss in depositor discipline would occur for holders 

only of previously uninsured accounts that are now 

insured; however, the resulting loss to depositor 

discipline may apply more broadly. Beyond the 

standard tradeoffs involved in deposit insurance 

reform, there are unique advantages and challenges 

to implementing Targeted Coverage. 

Under Targeted Coverage, instead of running in 

response to bank solvency concerns, depositors may 

simply move their deposits to an account with higher 

coverage within the same bank, to the extent they are 

able. Consequently, depositor discipline is weakened 

because the deposits do not flee the bank. Though 

it weakens depositor discipline, the ability to obtain 

more insurance by moving deposits across accounts 

within the same bank may increase financial system 

stability. First, because deposits remain within the 

same bank, the bank is under less pressure to liquidate 

assets. Second, panic-driven runs are less likely if 

depositors can obtain greater insurance by switching 

account types or transferring funds to a different 

account within the same bank. Third, the movement 

of funds to more highly insured accounts can itself 

serve as an early-warning signal for bank supervisors, 

managers, and boards to rectify risky behavior that 

may drive a flight to safety of deposits within the bank. 

Broader Market Efects 

Increasing or fully insuring only business payment 

accounts would limit disruptions to other asset 

markets that compete with deposits as investment 

vehicles. For example, absent a full insurance option 

on a business payment account at a single bank, a 

small or medium-size firm that needs liquidity to meet 

its day-to-day operations may allocate its funds across 

multiple banks and substitute products, weighing a 

combination of safety, convenience, and yield. Given 

the choice to keep its business payment accounts fully 

insured, the firm may willingly sacrifice yield, or may 

even pay a premium, to do so. In contrast, an investor 

seeking yield may find restrictions on business 

payment accounts (such as rate caps) insufficient to 

justify the benefit of insurance. Thus, to the extent that 

business payment accounts can be distinguished from 

investment accounts, Targeted Coverage may support 

banks in their essential role in the payment system 
2023 Options for Deposit Insurance Reform | 49 

while minimizing the distorting effects that unlimited Excess Deposit Insurance or increased deposit insurance may have relative to 

other assets. Coverage 

Consistency and Transparency 

Targeted Coverage may increase complexity compared 

with other options for deposit insurance reform. Even 

in its most basic form—for example, with two types 

of accounts (qualifying vs. non-qualifying) and two 

different limits—differential insurance would naturally 

generate questions from depositors about the actual 

insurance limit on their accounts. Because the criteria 

for qualifying accounts would need to be detailed, 

many depositors might find the criteria difficult to 

understand. It would be important for banks to be 

transparent about the insurance limits and relevant 

account details, and new disclosure requirements 

may need to be considered. Banks may need to clearly 

and regularly specify to depositors the insurance limit 

associated with each account type (e.g., at account 

opening, on their account webpage, and on account 

statements). 

Increased or unlimited deposit insurance for business 

payment accounts would reduce the role of perceived 

protection against uninsured depositor losses, 

providing greater consistency and transparency. 

Fund Adequacy 

Offering increased or unlimited insurance on only 

specific accounts would reduce the exposure of the 

FDIC in a failure, as compared with full insurance 

on all account types (holding constant the risk of 

bank failure), though this option would still entail a 

significant expansion of the DIF. The extent to which 

the DIF would need to expand would be a function of 

both how business payment accounts are defined and 

the extent to which the demand for business payment 

accounts results in inflows from other asset markets. 

Although assessments would likely need to increase, 

it is difficult to estimate to what extent. 

In addition to changes in deposit insurance coverage, 

there are options that would address different aspects 

of the current deposit insurance system. These warrant 

consideration alongside the options for changes in 

deposit insurance coverage. 

Excess deposit insurance, or voluntary coverage for 

deposits above the insurance limit, may be an option 

alongside changes to deposit insurance limits. In 

theory, optional coverage may be provided at the bank 

or depositor level, and may be provided by the private 

sector, by the FDIC, or by a combination. 

To be credible, an insurer must have the funds to 

cover the loss event against which it is insuring. 

Excess deposit insurance would have to address the 

concentration of deposits in a single institution that is 

subject to a loss event, the correlation of loss events 

across small institutions associated with banking 

crises, and the combination of the two. Absent the 

federal government backstop, it seems unlikely that 

private insurers can address those risks sufficiently 

to provide enough coverage to significantly enhance 

financial stability. The existing private excess deposit 

insurance market is limited in scope and coverage 

and does not address the challenge of industry 

concentration of uninsured depositors in large 

institutions.139 In an optional excess deposit insurance 

program, banks or depositors who pose systemic 

risks for which the program is designed would need 

to opt in for the program to be effective. If large banks 

or depositors opt out, historical experience is that 

they may continue to expect support from future 

interventions but would not bear the associated costs. 

Coverage that is optional neither changes perceptions 

about future support nor does it impose a cost on 

those benefiting from those perceptions. 

139Some organizations offer excess deposit insurance, but it is limited in scope, provides limited coverage, or the issuers retain the right to cancel, or all three. At 

least one such insurer abandoned offering coverage as the financial crisis took hold in 2008. The Deposit Insurance Fund in Massachusetts is a private, industrysponsored fund that provides excess insurance for all deposits above the FDIC coverage levels. Most member banks are either savings or cooperative banks. As 

of year-end 2022, member banks had approximately $77.8 billion in deposits, with insured excess deposits of $28.6 billion. The Massachusetts fund had a $487 

million fund balance. See https://www.difxs.com/DIF/Home.aspx. 
50 | 2023 Options for Deposit Insurance Reform 

Accurate pricing of bank risk-taking for deposit 

insurance is already a challenge. Pricing excess deposit 

insurance would be an even larger challenge given 

the adverse selection problem: banks or depositors 

who opt into an excess deposit insurance system are 

likely to have different characteristics than banks 

or depositors who do not opt in. Fair pricing would 

require that the FDIC account for the decision to opt in, 

in addition to the typical challenges associated with 

pricing. 

Financial Stability 

The effects of excess coverage on financial stability 

would depend upon the participation of uninsured 

depositors. If participation is sufficient and funds are 

available in a timely manner, excess deposit insurance 

would have significant stability benefits. If there is 

insufficient participation or payment on excess deposit 

insurance claims were delayed, however, excess 

deposit insurance would have limited impact on 

financial stability. 

If excess deposit insurance were offered at the bank 

level, it is likely that banks most exposed to bank 

runs would opt in. Thus, voluntary participation has 

a beneficial aspect of encouraging the participation 

of banks for whom run risk is highest. Banks would 

have an incentive, however, to opt in when they are 

experiencing stress or are near failure. For a viable 

system, eligibility requirements to opt in would be 

necessary; if some banks are not eligible, they would 

still be exposed to runs and thereby affect financial 

stability. 

Deposit insurance for an individual depositor at a 

bank reduces that depositor’s incentive to run and 

reduces run risk at that bank. Similarly, the decision 

of an individual bank to obtain excess deposit 

insurance coverage reduces the contagion risk within 

the banking system. When choosing a level of excess 

coverage, individual depositors and banks are likely to 

consider only the benefits of coverage to themselves 

and are unlikely to consider the benefits they bring to 

the system when opting in. Thus, the benefits to the 

system are likely higher under mandatory coverage 

relative to voluntary coverage. 

Moral Hazard, Market Discipline, and Depositor 

Discipline 

The implications of excess deposit insurance on moral 

hazard, market discipline, and depositor discipline 

are ambiguous. Depositors who exhaust significant 

resources to monitor banks may find it preferable to 

obtain voluntary excess deposit insurance, if offered. 

If depositors who previously monitored the bank opt 

into voluntary coverage, excess deposit insurance 

would have significant effects on depositor discipline, 

with associated effects on moral hazard and bank 

risk-taking. But if the least resourced depositors who 

currently monitor less have strong preferences for 

insurance and are most likely to opt in, then the effects 

of excess deposit insurance coverage on risk-taking 

incentives would be smaller. 

So long as deposit insurance pricing does not perfectly 

account for the associated run risk, banks with 

the highest exposure to run risk have the greatest 

incentive to opt into bank-level voluntary deposit 

insurance. Therefore, moral hazard is also likely to 

increase for banks most prone to risk-taking in a banklevel voluntary deposit insurance system. 

Tools such as deposit insurance pricing may be used 

alongside excess deposit insurance coverage to 

mitigate moral hazard. However, voluntary deposit 

insurance programs are subject to adverse selection 

problems that affect other insurance programs: the 

agents that opt into the insurance program are those 

for whom the expected benefits of insurance exceed 

the costs of participation. Fair risk-based pricing for 

deposit insurance is already a challenge, and adverse 

selection makes the challenge of fair pricing of 

voluntary deposit insurance even greater. 

Broader Market Efects 

Voluntary excess deposit insurance is unlikely to have 

notable broader market effects. Especially for small 

banks, there already exist private excess deposit 

insurance programs for which deposit concentrations 

are not as significant of a concern as they are in the 

broader economy. It is unclear that broader market 

effects are significantly different in the presence of 

excess deposit insurance. 
2023 Options for Deposit Insurance Reform | 51 

Consistency and Transparency 

Excess deposit insurance likely would not significantly 

improve the consistency and transparency of the 

deposit insurance system. Financial stability concerns 

would continue to motivate perceptions of future 

interventions of support. 

Fund Adequacy 

If excess deposit insurance coverage were to be 

funded by the DIF, then banks that did not opt into the 

program would share the risk with those that opted 

in. Given its structure, an excess deposit insurance 

system would therefore likely be managed in parallel 

to the DIF and would not have direct implications for 

Fund adequacy. However, if a separate insurance fund 

is created for the program, then it would risk being 

underfunded. 

In addition to adverse selection problems across 

banks, there is also an adverse selection problem 

across time that would inhibit the adequacy of an 

excess deposit insurance system. During periods 

of financial calm, the incentive to participate in a 

voluntary program are low when compared with 

periods of economic stress. An excess deposit 

insurance fund is likely to struggle to maintain 

adequacy to cover the difference in demand for 

deposit insurance over the financial cycle. 

Additional Options 

Under Limited Coverage and Targeted Coverage, 

large concentrations of uninsured depositors may 

remain. This section of the report considers two 

options that may complement those options to help 

achieve financial stability objectives in the current 

environment. 

Require Secured Deposits for Large Uninsured 

Deposits 

Requiring that short-term liabilities are funded with 

short-term assets is a commonly proposed solution 

for solving the financial stability challenges associated 

with runnable liabilities. Backing short-term liabilities, 

such as deposits, with safe, short-term assets 

effectively separates the payment system and credit 

intermediation functions of banks. 

Some specific segments of the deposit market already 

segment the payment system and intermediation 

functions of banks. Depending on state or federal 

law, otherwise uninsured deposits of state, county, 

or municipal governments, and their political 

subdivisions, are secured by collateral or assets of 

the bank.140 In the event of failure, the FDIC honors 

valid and enforceable collateralization agreements 

applicable under law. The value of the collateral, 

however, may not be sufficient to cover the uninsured 

amounts at par. 

Although the tradeoff between stability and credit 

intermediation may not justify a collateralization 

requirement in general, for large uninsured deposits, 

the experience of public deposits suggests that 

there may be cases in which the public interest in 

financial stability outweighs the associated costs 

to credit intermediation. The challenges posed by 

concentrations of large deposits at large institutions 

suggest that for such depositors and institutions, 

mandating that uninsured deposits, or possibly those 

above some larger dollar threshold, be secured by safe 

assets merits consideration. 

Among the benefits of collateralizing deposits for 

large depositors is that it decreases the depositor’s 

burden of monitoring. Rather than requiring 

depositors to understand bank financial statements 

and assess the riskiness of their portfolio, or make 

conjectures about the likelihood of a systemic risk 

determination, depositors need only to understand 

the evaluation of the specific, well-defined collateral 

backing their deposits. Such an expectation is the 

norm for custodians of funds at municipal, county, 

and state governments and can therefore be seen 

as a reasonable expectation for decision-makers at 

large firms. If secured depositors are more attuned to 

monitoring collateral, they may also impose increased 

haircuts, which may also serve as an early-warning 

signal to supervisors. 

An additional benefit of secured deposits is that they 

allow private markets to price the risks associated with 

concentrated short-term liabilities. Banks that issue 

uninsured deposits would continue to provide liquidity 

but would expand their balance sheet, and would 

likely pass those costs to the large depositors. Doing 

140 FDIC, Deposit Insurance for Accounts Held by Government Depositors, https://www.fdic.gov/deposit/deposits/factsheet.html. 
52 | 2023 Options for Deposit Insurance Reform 

so would discourage the largest depositors from cash 

hoarding, especially at a single financial institution, 

and would discourage large depositors from relying on 

market perceptions of support to earn yield: uninsured 

deposits used for investment rather than transaction 

services would likely benefit from investing directly in 

the desired collateral rather than through the costly 

expansion of bank balance sheets. 

However, secured deposits likely would not entirely 

solve the problem of runs if an institution is suddenly 

revealed to be undercapitalized. As in repo markets 

in 2007–2008,141 short-term collateralized loans also 

may be subject to runs. Upon realizing that its financial 

institution may be undercapitalized, a secured 

depositor is likely to prefer withdrawal to recouping 

collateral in a resolution process and incurring the 

valuation risk associated with the collateral in a failure. 

From a competitive standpoint, the collateralization 

of deposit services for the largest depositors is likely 

to affect primarily large institutions that hold most 

of the uninsured deposits. Aggregate large bank 

credit supply could be curtailed relative to smaller 

institutions. Whether overall credit supply is reduced 

depends on the ability of smaller banks and nonbank 

financial intermediaries to meet the demand. From 

the perspective of deposit market competition, 

secured deposits are likely to make small banks 

less competitive for the largest uninsured deposits 

given their balance sheet capacity. However, small 

banks are already less competitive for uninsured 

depositors, especially the largest depositors who 

might be targeted by a collateralization requirement. 

Requiring collateral for large deposits also would 

limit the capacity of insured institutions to provide 

the deposits. Requiring the collateralization of large 

deposits may therefore lead to both reductions in 

credit supply and a reduced capacity of the system to 

meet the demand for large deposits. Although both 

outcomes are consequential, they may be the result 

of a current mispricing of the liquidity risk posed by 

large quantities of uninsured deposits due to market 

perceptions of support in crisis. 

Mandating the collateralization of large uninsured 

deposits also could have broader market implications. 

Banks issuing uninsured deposits would have greater 

demand for safe, short-term assets, thereby driving up 

the price. Depositors may also find the newly priced 

deposits unattractive and migrate out of the banking 

system. Depending on where the large depositors 

migrate, the associated run risk may migrate with 

them without improving financial stability. 

Secured deposits could also have implications for fund 

adequacy. While an increase in the deposit insurance 

limit increases insured deposits and the necessary size 

of the DIF, converting uninsured deposits into secured 

deposits would not directly affect the amount of 

insured deposits or the reserve ratio. However, secured 

deposits stand ahead of the FDIC in the priority of 

receivership claims, and so could increase losses to the 

DIF and uninsured depositors in resolution. 

Requiring collateral for uninsured depositors could 

apply to the entire class of uninsured deposits or for 

uninsured deposit accounts above some threshold, 

and could apply at the depositor or institution 

level. Requiring collateralization of some uninsured 

deposits also could be applied only to banks with 

material concentrations of uninsured deposits or other 

runnable liabilities. While the experience of public 

deposits is a natural starting point for operationalizing 

secured deposits, the costs and benefits of any 

mandate on collateral for uninsured deposits are 

complex and beyond the scope of this report. 

Limit Convertibility of Deposits Above 

the Deposit Insurance Limit 

One possibility to limit the extent to which a run by 

large depositors can inflict sudden damage to a bank 

and the broader economy is to limit the full liquidity 

of large, uninsured accounts.142 Placing constraints on 

the ability of large depositors to withdraw funds would 

be a variation of the bank suspensions that occurred 

in large numbers before the creation of the FDIC, but 

such constraints could be more tailored than those 

suspensions were. Such limitations could apply 

141Gorton and Metrick (2012). 

142Existing tools limit convertibility for money market funds. For example, SEC Rule 2a-7 passed in 2014 allows a money market fund board to impose up to a 2 

percent liquidity fee during stress or temporarily suspend redemptions. See https://www.sec.gov/news/press-release/2014-143. 
2023 Options for Deposit Insurance Reform | 53 

to deposits above the deposit insurance limit, or at 

a considerably higher level. They could apply in the 

normal course of business, or banks could have the 

discretion to apply them in the face of financial stress; 

bank supervisors could also determine how to apply 

the limitations. 

For example, deposit accounts above some threshold 

could be restricted from withdrawing more than 

some percentage of their account balance within a 

specified timeframe.143 Additional withdrawals would 

be allowed after the specified timeframe. Thus, the 

largest depositors would be restricted from liquidating 

their accounts on demand. Withdrawal requests that 

approach or exceed the threshold may then also 

serve as an early-warning signal for supervisors. In 

addition, large depositors would maintain some skinin-the-game following large withdrawals, suppressing 

incentives to incite further panic and maintaining an 

interest in the franchise value of a bank in resolution. 

In addition to reducing the ability of large depositors 

to run, limiting liquidity for the largest depositors 

may also induce these depositors to diversify funds 

more broadly across banks, thereby reducing their 

concentration at a single bank. A more diversified 

depositor base may then further contribute to 

financial stability. 

Finally, limiting the liquidity of large uninsured 

deposits may increase the incentives of the largest 

depositors to exert market discipline in a manner 

that reduces bank risk-taking. A large depositor with 

concerns about bank solvency has an incentive to 

withdraw funds immediately. If the ability to withdraw 

funds is limited, large depositors are more likely to 

retain exposure to the bank in a failure. Consequently, 

incentives of the largest depositors may be more 

closely aligned with other debtholders and the 

resolution authority and may induce those depositors 

to discipline the bank in a way that does not threaten 

its value in a failure event. 

For mismanaged and undercapitalized banks, limiting 

the liquidity of the largest accounts is unlikely to 

prevent a bank failure. Instead, by slowing the run, 

the FDIC would have time to resolve the bank through 

an orderly resolution process, rather than through a 

costly bank run. Similarly, limiting withdrawals will 

not necessarily prevent the contagious spread of 

concerns about banks’ health. Knowing that large 

withdrawals are occurring at some banks may cause 

large depositors at other banks to do the same. But 

again, the limitations on withdrawals could greatly 

slow the speed with which liquidity issues can 

propagate, supporting financial stability and the 

orderly resolution of problems. 

143McCabe, Cipriani, Holscher, and Martin (2012) propose that a small fraction of each money market fund investor’s balance be demarcated to absorb loss, a 

“minimum balance at risk,” if the fund is liquidated.