ABA Recommends Changes to Deposit Insurance and Bank Resolution Framework

The American Bankers Association ("ABA") urged policymakers to overhaul the nation’s deposit insurance and bank resolution framework.

In a position paper, prepared by an association Task Force on Deposit Insurance Modernization, the ABA said the Federal Deposit Insurance Corporation’s ("FDIC") current tools and processes—largely unchanged since the last crisis-era reforms—are not suited to today’s financial environment. The ABA said the recommendations were, in part, a response to the 2023 failures of Silicon Valley Bank and Signature Bank, which exposed significant gaps in the current system. 

The ABA recommended: 

1. Congressional Pre-Approval for Enhanced FDIC Coverage. Grant the FDIC pre-approved authority to temporarily increase deposit coverage or guarantee other liabilities during severe stress events without waiting for new legislation. 
2. Greater Transparency in Systemic Risk Determinations and Special Assessments. Require the FDIC to publish clear guidelines and methodologies for determining when "systemic risk" exists and how costs are allocated among banks in follow-up special assessments.
3. Empirically Based Coverage Limits. Ensure any change to the $250,000 coverage cap is based on robust data analysis, with industry input, and is automatically adjusted for inflation.
4. Maintain a Stable DIF. Reassess the size and structure of the Deposit Insurance Fund ("DIF") to ensure it is appropriately calibrated to risk without being overcapitalized.
5. Restore Tax Deductibility of FDIC Assessments. Reverse 2017 tax law changes that limit or eliminate the deduction for FDIC premiums.
6. Explore Optional Excess Deposit Insurance. Study the feasibility of allowing banks to purchase additional FDIC coverage for certain products—such as fixed-term certificates of deposit—as a lower-cost alternative to private insurance.
7. Broaden the "Least Cost" Test. Expand the scope of the “least cost” test for bank resolutions to include the potential costs of financial contagion and other systemic impacts.
8. Increase Community Bank Participation. Permit exceptions to the least cost test  to enable community banks to acquire deposits or branches from failed institutions in their markets, preserving local access to banking.
9. Broaden Access to Failed Bank Asset Auctions. Publish objective qualification standards for bidders, pre-vet smaller institutions, and allow consortium bids to diversify participation and improve competition.
10. Disclose Resolution Options. Require the FDIC to publicly release the different resolution approaches it considered for a failed bank and their respective estimated costs to enhance transparency and public confidence.

The ABA said these proposals aim to give the FDIC greater flexibility in a crisis, improve fairness in cost allocation, and adapt deposit insurance to modern banking conditions.