The problem with the FDIC’s deposit insurance coverage system, as bank executives testified this month in front of the Senate Banking Committee, is that it is not working for their bank depositors, especially their business accounts, some of whom say they need $20 million coverage for their payroll deposits. And insufficient coverage complaints by business customers are across the board, large and small. In addition, because of inflation, the $250,000 cap that Congress set in 2010 is worth just about half its value today. However, increasing insurance coverage will result in higher deposit insurance assessments, which large banks, which pay most of the assessments collected by the FDIC, already find expensive, made worse by the fact that they cannot deduct the premium expense for tax purposes. With the balance of the Deposit Insurance Fund (DIF) already at a record $145 billion, the FDIC is still targeting 2% of insured deposits as a goal it plans to meet through further assessments.

FDICcase for a rate cut next month insurance is a national success story because, for most of its 92-year history, leaving aside the S&L crisis in the early 1980s, the financial crisis in 1989-1991, the Global Financial Crisis in 2008, and the regional bank crisis in 2023, most of the time, thanks to strong bank supervision and capital requirements, the number of bank failures is low and the losses when banks fail have been low, too (Slide 1). As a result, the FDIC can rebuild the DIF after losses deplete it, without needing any additional capital support from taxpayers. Over the last 6 quarters, for example, the FDIC added back to the DIF nearly $1 billion through cumulative negative provisions for insurance losses (Slide 2), which is partly why the DIF now exceeds the statutory 1.35% minimum versus insured deposits (Slide 3).

Meanwhile, depositors seem to be putting more of their savings in uninsured accounts. Thus, the balance of deposit accounts over $250,000 (Slide 4), uninsured deposits (Slide 5), and even the balance of money market funds (Slide 6), which are also uninsured, all increased in the last six quarters.

The low-cost funding that FDIC deposit insurance creates is a critical component of bank treasury and a powerful driver for net interest margins and income. For example, the national rate on a 3-month CD never got higher than 1.6% when the Fed was raising the Fed funds rate in 2022 and 2023, and when the Treasury was paying 3-month T-Bill investors over 5% (Slide 7).

For all its present shortcomings, the U.S. deposit insurance system is still one of the most generous in terms of coverage compared to systems in other countries (Slide 8). And most banks pay less than eight basis points in annual assessments, not only in terms of numbers (Slides 9) but also in size, with the FDIC assessing banks accounting for 92% of all insured deposits in the system between 2.5 and 8 basis points a year against their total liabilities (Slide 10).