Order Code RS20724
Updated February 14, 2003
CRS Report for Congress
Received through the CRS Web
Federal Deposit and Share Insurance:
Proposals for Change
William D. Jackson
Specialist in Financial Institutions
Government and Finance Division
Summary
Many Members of Congress are concerned about the federal deposit insurance
system. Earlier House-passed legislation and its Senate counterpart sought to change
the pricing of insurance, the coverage of accounts, and the financing of the Federal
Deposit Insurance Corporation (FDIC). Changes would affect the condition of insured
depository institutions, the strength of the insurance funds, and competition among
financial institutions. Increasing financial risks, leading some to suggest that deposit
insurance may need reform, became evidenced with the collapse of several banks,
Enron, WorldCom, etc. The 108th Congress has begun to reexamine the issues raised
by prior-Congress measures. H.R. 453, the Municipal Deposit Insurance Protection Act
of 2003, would have FDIC insure governmental deposits up to at least $2 million. H.R.
522, the Federal Deposit Insurance Reform Act of 2003, is a broad measure revisiting
last year’s House-passed measure. It would internally restructure FDIC, change FDIC’s
pricing of insurance, and increase basic per-account coverage to $130,000 and future
inflation. S. 229, the Safe and Fair Deposit Insurance Act of 2003, has markedly similar
provisions. The Bush Administration FY 2004 Budget expresses support for deposit
reform in similar terms, except for opposing increased coverage of accounts to
$130,000. This report analyzes the underlying issues affecting deposit insurance. CRS
will update this report as warranted. See the Electronic Briefing Book on banking and
financial services [http://www.congress.gov/brbk/html/ebfin1.shtml] for more
information on financial services issues.
What is Deposit Insurance and How is It Administered?
The full faith and credit of the United States stands behind more than $3 trillion of
insured deposits at banks and savings associations. This insurance guards savers’
accounts up to $100,000, providing stability to banks and to the economy. Congress
legislated deposit insurance in the 1930s, modifying it in 1989 and 1991 in response to
financial crises. Congress now requires all banks and savings associations to carry this
insurance. Government has not formally insured foreign office deposits, although very
Congressional Research Service ˜ The Library of Congress

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large banks rely upon them. Smaller institutions find deposit insurance, including extra
coverage for municipal, joint, trust, and retirement accounts, very valuable.
Pursuant to P.L. 101-73 and P.L. 102-242, the independent agency Federal Deposit
Insurance Corporation (FDIC) has two funds. The FDIC’s two funds are interest-earning
accounts maintained with the U.S. Treasury. Its Bank Insurance Fund (BIF) dates from
1934. Congress intended it and its ancestor the Permanent Insurance Fund to cover
commercial bank deposits. BIF members are predominantly commercial and savings
banks supervised by FDIC, the Office of the Comptroller of the Currency, or the Federal
Reserve. Its Savings Association Insurance Fund (SAIF) is the successor to a failed fund
(“Federal Savings and Loan Insurance Corporation”) covering savings institution deposits.
SAIF members are predominantly thrift institutions supervised by the Office of Thrift
Supervision. Many institutions have deposits that the “other” Fund insures because of
mergers, thus complicating FDIC administration and financing.
Institutions do not “own” either Fund. BIF and SAIF balances are on-budget assets
of the government. BIF’s balance is $31 billion and SAIF’s balance is $12 billion.
Interest on these amounts and income from assessments on covered institutions has long
been more than enough to cover FDIC’s costs, including of closing failed institutions.


FDIC requires institutions to pay semiannual assessments to reflect their own risk
and other factors, and, by statute, must make their premiums reflect the relative sizes of
BIF and SAIF. Both Funds have target ratios of 1.25% ($1.25 per $100) of their balance
against insured deposits. That percentage is the statutorily targeted Designated Reserve
Ratio (DRR). When either Fund exceeds that value, then its members do not have to pay
assessments into it, unless capital or managerial deficiencies make them risky.
Institutions regard fund balances much above than 1.25% as “excess deposit insurance”
which FDIC should refund to them. Institutions argue that, in the general spirit of tax
cuts, institutions that paid into the respective Fund should get back their “surplus.” In the
other direction, should either Fund fall below its DRR, institutions must pay (at a rate of
up to 23 cents per $100 of insured deposits, large when compared with their profit
margins) to fill the fund’s shortfall. That would greatly increase the near-zero cost of
deposit insurance. Many would prefer to smooth out assessments over time as needed to
maintain adequate fund balances. At 1.25%, BIF is just at the so-called cliff point below
which assessments are called for, while SAIF is better capitalized at 1.39%.
A separate organization insures “share” accounts at credit unions: the National Credit
Union Share Insurance Fund (NCUSIF). Congress created NCUSIF in 1970. The
National Credit Union Administration (NCUA) administers it. While all federally
chartered credit unions must belong to NCUSIF, state-chartered ones may choose to join
it. Federally insured credit unions fund NCUSIF differently than BIF and SAIF. Credit
unions, owning NCUSIF, put 1% of their total “shares” (deposits) into NCUSIF,
beginning in 1985. Their contributions remain assets on the books of the credit unions,
representing their investment in NCUSIF. It invests in government obligations, retaining
the earnings on them. NCUA may also levy a premium if needed, but has charged only
one premium, when three large New England credit unions failed in 1992. It, too, has a
reserve ratio of 1.25% of insured deposits with a recent balance of about $5 billion.

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Background: The Purpose and Problem of Deposit Insurance
The purpose of deposit insurance is twofold: it is, first, to protect depositors against
risks they cannot control, and, second, to enhance economic stability. In exchange for
these benefits, however, the insurance also entails some hazards for the government.
Purpose. Deposit insurance, as provided by the government, makes deposits safe
by assuring depositors that they can get their money even if their bank fails. It protects
depositors from a sudden and unforeseen loss of wealth. It also protects the economy
against sudden contractions due to a loss of liquidity in the banking system.
The current federal deposit insurance program commenced during the Depression
years, in response to just such a loss of liquidity. When some banks failed, depositors
who were not first in line to withdraw their money lost much or all of their balances.
Depositors in other banks, fearing further failures, “ran” to withdraw funds from their
own, otherwise-healthy banks while cash was still on hand. Even a sound bank cannot
withstand a run. Deposits are used to make loans which banks cannot immediately call
in to pay off depositors. If an entity with deep pockets cannot stem the run, more banks
fail through contagion. The overall effect is to shrink the money supply, curtail lending
for business and other economic activity, and thus to contract the economy.
Deposit insurance stops such contractions, so that bank runs have not occurred on
the national level since its inception. They have occurred locally, when federal deposit
insurance was absent, with effects ranging from inconvenience to genuine hardship.
Taxpayers of affected states eventually bore much of the burden of cleaning up after
failures of institutions insured by state instrumentalities.
The Problem of Moral Hazard. A problem for policymakers is the tradeoff
between protection and the loss of market discipline in financial institutions that comes
from the insurance. Observers know it in the industry as “moral hazard.” That is,
depositors have no reason to be concerned about the risks a bank takes with their funds
since government insurance protects them. Banks, knowing that depositors have no
reason to care, have a financial incentive to take on greater risks than they otherwise
might, in the expectation of earning greater returns. Bankers retain profits from risky
investments. Catastrophic losses fall on government should the investments fail.
If a deep-pocket insurer has not insured depositors, they and other bank creditors
have every reason to monitor a bank’s riskiness. If they perceive that their funds are not
well handled, they may require higher interest rates on their monies to compensate for the
extra risk. That brings down the returns from risky investments for a bank and, therefore,
discourages risk-taking. The behavior of uninsured, but presumingly knowledgeable,
depositors gives regulators another way of monitoring the complex activities of banks and
of protecting against serious systemwide problems. Such monitoring theoretically eases
the regulation of very large banks, funded mainly by uninsured large deposits, that present
systemic risks to the nation’s financial system. It is of limited value for the vast majority
of smaller institutions whose funding comes mainly from insured deposits, whose
financial position Wall Street does not follow closely.

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Issues
Ongoing congressional consideration of changes in federal deposit insurance began
in February 2000 when the House Banking Subcommittee on Financial Institutions held
hearings on problems of depository institutions and FDIC. Interest was evident in asking:
—Should Congress increase the $100,000 coverage for deposits at banks and savings
associations, and shares at credit unions? Should inflation, perhaps retroactively since
1980, and in future years, be used to “index” FDIC coverage to preserve the purchasing
power of deposits?
—Should FDIC insure deposits of municipalities at a greater level?
—Should FDIC insure retirement and pension accounts at a greater level?
—What should institutions pay for deposit insurance coverage and associated
regulation? Should premiums be smoothed out over time?
—If the balances in BIF and SAIF exceed amounts necessary to provide adequate
coverage, what should be done with the excess? Would refunds leave FDIC weakened?
—Is free or low-cost deposit insurance an unwarranted subsidy to banks in their
competition with nonbank financial firms? Or does it offset costs of complying with
bank-only regulations?
—Should Congress merge BIF with SAIF, as a 1996 statute planned?
—Are there better avenues to monitor and restrain risk-taking before it results in
FDIC payouts? Must large institutions be deemed too-big-to-fail: posing such systemic
risk to the economy that America must prop them up rather than close them?
—Should rapidly-growing banks who have paid little or no assessments, the so-
called free riders, be assessed premiums to compensate FDIC for resulting increased
exposure to payouts and the decrease in fund reserve ratios?
—What changes affecting FDIC operations might apply to credit unions?
We analyze these underlying issues in more depth in CRS Report RL31552.
Policy Considerations
Policymakers must weigh many factors in considering possible changes. A key issue
is how to provide the benefits of deposit insurance without lessening the incentives for
the managements of banks, savings associations, and credit unions to engage in prudent
operating practices. Owners and managers at covered institutions may take on greater
risks, in the expectation of greater rewards, if they know that customers are unlikely to
withdraw their deposits, as described above. The effectiveness of examination and
supervision arrangements thus has an important bearing on the exposure of the insurance
funds. Regulation of banks and savings associations to prevent failure ideally would
prevent FDIC from having to make good on its guarantee. Government can make no
system failure-proof, however. In a competitive economy, bad business decisions
resulting in closure guide future capital investment away from practices that failed.
Banks and savings associations are not exempt from this truth.
Tradeoffs exist among proposals for change. For example, increased account
coverage at banks and savings associations could require more reserves at BIF and SAIF,
making it less likely that the costs of FDIC insurance remain low. Alternatively, should
risk increase in financial markets, or the Funds’ coverage of insured deposits become very

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thin, institutions might have to make larger payments. Competitive equality is an
important consideration for different institutions (large versus small, banks and savings
associations versus credit unions, for example). Any expansion of the federal safety net
through FDIC has to be paid for. Policymakers have not viewed appropriations as
appropriate means of payment, which necessarily would come from covered institutions.
FDIC Recommendations and 107th Congress Activity
At a House Financial Institutions Subcommittee Hearing in May 2001, outgoing
FDIC Chairman Tanoue said the agency would like Congress to make statutory
improvements. It sought to merge the BIF and SAIF funds. It sought to charge regular
premiums based on institutions’ risks, whatever the level of the reserve ratio of the
fund(s). It suggested adjusting premiums gradually up or down as the health of the
fund(s) might change. If it made rebates, the agency would base them on past
contributions to building up the fund(s). It suggested indexing the basic account
coverage, to keep pace with future inflation, not necessarily boosting standard minimum
account coverage to $130,000. The agency believed that its recommendations would
produce a stronger, more properly priced, less volatile, system of deposit insurance.
Current FDIC Chairman Powell carried the effort forward. Regulators and
Administration officials endorsed many of FDIC’s recommendations at a House Financial
Services Subcommittee hearing, July 26, 2001. They approved of merging the two Funds,
charging premiums to all institutions, and replacing the DRR and associated premium
pricing with a more flexible approach giving FDIC greater discretion. They disagreed
somewhat over the FDIC’s proposal to index coverage to inflation. Some opposed
increasing the dollar amounts of coverage. The Senate Banking Committee held its
hearing on deposit insurance reform, August 2, 2001. Regulators repeated their views on
public policy issues. Another House hearing explored reforms on October 17. In it,
Powell expressed support for merging the two funds, indexing future account coverage
to inflation, raising coverage for retirement accounts, and changing the pricing of FDIC
insurance to reflect risks rather than formulas. We compare viewpoints of interest and
regulatory groups in CRS Report RL31643; observers expect their ideas and positions to
persist in the 108th Congress.
Members introduced several bills in the first session of the 107th Congress, none of
which became marked up. They sought to reform pieces of FDIC coverage and
operations. Much of their intent carried forward into legislation of the second session.
The House Subcommittee on Financial Institutions and Consumer Credit marked up
a package measure: H.R. 3717, the Federal Deposit Insurance Reform Act of 2002, on
March 7, 2002. The Financial Services Committee then approved it on April 17 by 52-2.
With several more changes, it passed the House by 408-18 on May 22, 2002.
House-passed H.R. 3717 would have done several major things. (1) Create a range
of reserve ratios, rather than the DRR minimum of 1.25%. The range could float between
1.15% and 1.40% of covered deposits. (2) Merge BIF with SAIF, into a single Deposit
Insurance Fund. (3) Increase basic account protection (“standard maximum deposit
insurance amount”) to $130,000. (4) Index future basic coverage to inflation every five
years. (5) Cover many retirement (IRA and “401(k)”) accounts for $260,000, twice the
standard maximum deposit insurance amount. (5) Increase coverage of within-state

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municipal deposits, to a maximum of $2 million. (6) Give banks refunds of premiums
should the Deposit Insurance Fund exceed 1.35%, ending their payments now required
when the ratio of insured deposits to their fund falls short. (7) Provide FDIC flexibility
for: reserving against future losses, recapitalizing the new Fund should it need greater
resources, and adjust basic account coverage according to inflation. (8) Give a credit to
institutions for assessments based on their insured deposits at the end of 1996, reducing
their net assessments. (9) Raise protection at credit unions to match that of banks.
The Senate bill S. 1945, Safe and Fair Deposit Insurance Act of 2002, had generally
similar objectives but several differing details. S. 1945 received a hearing in the Senate
Banking Committee on April 23, 2002. The Senate Banking Committee also received
referral of H.R. 3717. In that venue, both faced resistance to higher coverage of accounts.
The Administration and others were concerned that the increase would add to
governmental risk without providing much benefit to consumers. The vast majority of
depositors currently have fully insured accounts, with lower-than-limit balances or in
multiple accounts. Some smaller banks, and at least potentially, retirees, are considered
beneficiaries of higher deposit protection. Larger institutions and many government
officials oppose any increase since it could be costly: both to the FDIC, and to the banking
industry that would have to pay for the increased insurance. Costs to institutions of
higher assessments for the higher coverage could amount to $3.5 billion, according to the
Office of Management and Budget. We compare major provisions of the two measures
of 2002 in CRS Report RL31343 for historical reference.
108th Congress Legislation
Early in the 108th Congress, Members introduced measures that may receive priority
treatment. H.R. 522 has identical aims as the deposit insurance legislation that passed the
House floor, but that never came up in the Senate. The bill would: merge BIF and SAIF
into one Fund; end the 23-cent premium “rate cliff” that occurs when the reserve ratio of
insured deposits to premiums held falls beneath 1.25% for more than a year; create a
range within which the reserve ratio can float; increase coverage limits for individual
accounts to $130,000, index future coverage limits to inflation; double coverage for
Individual Retirement Accounts and 401(k)s; and, increase coverage limits for municipal
deposits. It would make credit union insurance match bank insurance. This legislation is
very similar to S. 229. The more limited H.R. 453 would provide FDIC coverage to
municipal (federal, state, local, etc. governmental) bodies of at least $2 million per
account. The Bush Administration asked for federal deposit insurance reform, but notably
did not endorse increasing coverage levels, in its Fiscal Year 2004 budget. It sought:
merging of the two FDIC funds; making a new floating reserve ratio for the merged fund
so that it remains adequately capitalized; and requiring all institutions–regardless of
capital rating–to pay FDIC for the insurance they receive. The agency, which Congress
would grant more discretionary power under the Bush plan, has been prohibited since
1996 from charging premiums to well-capitalized and well-run institutions.
Pending entry of the Schwab securities powerhouse into the banking business adds
weight to this legislation. On the other hand, many still oppose increasing how much
protection covers accounts. We analyze the coverage issue in CRS Report RL31463.

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