Deposit Insurance Reform

What's the problem?

U.S. banks are consolidating in record numbers and the size and complexity of our largest banks are growing. While this consolidation and growth may not, in and of itself, be bad, one thing is clear: The loss of just one of these too-big-to-fail (TBTF) banks will pose an even greater systemic risk than before. Yet, too much depositor protection can result in such banks taking too much risk.

Minneapolis Fed Proposal

Fixing FDICIA: A Plan to Address the Too-Big-to-Fail Problem, 1997 Annual Report essay
Remarks by Gary Stern at the FDIC Conference on Deposit Insurance, January 29, 1998
Too Big To Fail: The Hazards of Bank Bailouts, Excerpt from book by Gary H. Stern and Ron Feldman, The Region, December 2003

Evolution of Minneapolis Fed Thought

Other Perspectives
Other proposals include privatizing deposit insurance and allowing banks engaged in complex activities to give up direct access to deposit insurance in return for reduced regulation and oversight.

International Experience
The United States isn't the only country looking at the issue of deposit insurance.

Media Response
U.S. media is also responding to this issue.

Long-Term Capital Management
Too-big-to-fail?

The Minneapolis Fed Proposal

To guarantee that uninsured depositors cannot be protected fully under the too-big-to-fail (TBTF) policy, and to thereby minimize the impact of the moral hazard problem, Congress should amend the Federal Deposit Insurance Corp. Improvement Act of 1991 (FDICIA) as follows:

Prohibit the full protection of uninsured depositors and other creditors when TBTF is invoked.
Incorporate the risk premium that depositors and other creditors receive on uninsured funds into the assessments on TBTF banks.
Require the disclosure of additional data on banks' financial condition.

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