Abstract

Deposit Insurance Reform: The Insuring Agencies Proposals

Congress recognized that even though deposit insurance has provided some valuable benefits to the United States, the role of deposit insurance in a deregulated financial system should be reviewed. The Garn-St Germain Act asked the FDIC, FHLBB, and the NCUA to review deposit insurance and report back with their recommendations. All three government deposit insurance agencies believe that deposit insurance still performs a valuable function, but each argues that some reforms in deposit insurance are desirable. The FDIC favors several different reforms. It supports variable rate deposit insurance provided by the government to introduce equity across banks to the deposit insurance premium schedule, but it does not expect its proposal to affect bank risk exposure significantly. The FDIC also favors a reduction in the de facto deposit insurance given large depositors to increased their incentives to monitor insured institutions’ risks. The FDIC would like to disclose supervisory actions taken against individual banks. The FHLBB supports variable rate deposit insurance and the use of private insurance to encourage thrifts to reduce risk exposure. It also believes thrifts should have more capital and that their owners and directors should take a more active role in controlling their institution’s risk exposure. The NCUA believes credit unions’ risk could be reduced if those that attract large accounts (over $50,000) would pay more for their insurance and if the first share of every member were not insured. The NCUA would give federal credit unions the option of substituting private for public insurance. It favors a one time one percent assessment of credit union shares to increase capitalization of the NCUA’s fund