Senators Introduce Bipartisan Bill to Expand Deposit Insurance Coverage
Commentary by Thomas Delaney
Senate Banking Committee members Bill Hagerty (R) and Angela Alsobrooks (D) introduced bipartisan legislation to expand federal deposit insurance coverage for noninterest-bearing transaction accounts.
The "Main Street Depositor Protection Act" would amend the Federal Deposit Insurance Act and the Federal Credit Union Act to authorize the FDIC and the NCUA to insure up to $10,000,000 per depositor for funds held in one or more noninterest-bearing transaction accounts. This expanded coverage is in addition to the standard maximum deposit insurance amount. The bill defines noninterest-bearing transaction accounts as those that do not accrue or pay interest, allow withdrawals by check, payment order, or electronic transfer, and do not require advance notice of withdrawal.
The increased deposit insurance coverage explicitly does not apply to deposits maintained at any insured depository institution that is a subsidiary of a global systemically important bank holding company ("G-SIB") or any insured branch of a foreign bank. This ensures the policy is focused on community and regional financial institutions. To ensure an orderly transition, the bill establishes a ten-year phase-in period for incorporating these newly insured deposits into the calculation of the deposit insurance funds’ value. Within one year of enactment, the FDIC and NCUA must publish implementation plans outlining the schedule for gradual inclusion, reaching full coverage by the end of the ten-year period.
The bill further seeks to reduce burdens on smaller institutions by exempting insured depository institutions with $10 billion or less in total assets from paying special or increased assessments which were imposed solely to offset the costs of expanded coverage during the transition period. It also grants the FDIC and NCUA authority to issue regulations implementing the Act’s provisions and to prevent institutions or third parties from evading the new insurance limitations.
Commentary
The fact that this is a bipartisan bill is noteworthy in itself. The bill would increase deposit insurance coverage to checking and NOW account balances, which currently are covered together with other types of deposits, but only for such balances at non-SIFI domestic banks and credit unions. The $10 million balance threshold is much higher than the $250,000 insurance threshold provided to deposit accounts under current law. If enacted, this could lead businesses and wealthy individuals to maintain much higher balances in these accounts. Unlike deposit accounts, which tend to be stable, transaction accounts are not, which could challenge banks and credit unions to match an increase in transaction balances to investment opportunities. It is also notable that the bill provides for 10 year ramp up period in the FDIC’s ability to impose increased premium assessments as a result of increases in transaction account balances that may accrue as a result of the legislation.
Transaction accounts are generally regarded as the least sticky of the various types of deposits held by banks and credit unions. While increasing deposit levels for these types of accounts should provide some comfort to business depositors suffering from SVB induced PTSD, if a bank is viewed by the market as being in danger of failure, deposits are likely to flee despite the availability of deposit insurance because, while depositors may ultimately be paid for funds held in transaction accounts at a failed bank, the risk that a business’ payment capability could be interrupted for a period of 24-48 hours, is likely to far outweigh the marginal value of deposit insurance coverage.