Order Code RS20724
Updated April 4, 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 costs and benefits of the
current deposit insurance system. Legislators, regulators, interest groups and academics
started examining many proposals for changes 2000. Resulting legislation has sought
to change the pricing of insurance, how much coverage should exist for customers’
accounts, and financing the insuring Federal Deposit Insurance Corporation (FDIC).
Changes could 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 end of several banks, Enron, WorldCom, etc. The 108th Congress has
reexamined these issues. H.R. 522, the Federal Deposit Insurance Reform Act of 2003,
is a broad measure revisiting last year’s House-passed measure. As marked up by the
House Financial Services Committee on March 13, 2003, it would restructure FDIC,
change FDIC’s pricing of insurance, and increase basic per-account coverage to
$130,000 and for future inflation. It incorporates H.R. 453, for greater insurance of
municipal deposits, as well. H.R. 522 passed the House on April 2, 2003, by a vote of
411 to 11. S. 229, the Safe and Fair Deposit Insurance Act of 2003, has similar
provisions. The Administration supports deposit insurance reform in very similar terms,
but opposes coverage of accounts of $130,000. 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 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 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 minimum that calls for assessments, while
institutions have better capitalized SAIF 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 P.L. 104-208 planned in 1996?
—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
managers 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
thin, institutions might have to make larger payments. Competitive equality is an

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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. Payment 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 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.
Current FDIC Chairman Powell carried the effort forward.
Members introduced several
bills in the first session, none of which became marked up. The Subcommittee on
Financial Institutions and Consumer Credit marked up: H.R. 3717, the Federal Deposit
Insurance Reform Act of 2002, on March 7. The Financial Services Committee approved
it on April 17. With several changes, it passed the House by 408-18 on May 22, 2002.
The House-passed bill 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 5
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
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.
Senate bill S. 1945, Safe and Fair Deposit Insurance Act of 2002, had similar
objectives but differing details. S. 1945 received a hearing in the Senate Banking
Committee on April 23, 2002. The Senate Banking Committee also received H.R. 3717.
In that venue, both faced resistance to higher coverage of accounts. (We compare major
provisions of these two measures in CRS Report RL31343 for historical reference. We
also compare viewpoints of interest and regulatory groups in CRS Report RL31463,
because they persisted into the 108th Congress).
108th Congress Legislation
H.R. 522, introduced by Representative Bachus, noted below, is very similar to S.
229, introduced by Senator Johnson. Both mirror the bills noted above from the 107th
Congress. H.R. 453, introduced by Representative Gillmor, would provide FDIC
coverage to municipal (federal, state, local, etc.) governmental bodies up to $2 million per

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account or lesser coinsured amounts. The Administration 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 insurance. 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, by that leaving only 9% to 10% of depositories
paying insurance premiums. Banks controlled by Citigroup and Merrill Lynch have
required FDIC to protect them in large amounts, yet have paid little or no premiums
Specifically, the Oxley-Frank Managers’ Amendment form of H.R. 522 passed the
Financial Services Committee by voice vote March 13, 2003. This bill would:
–merge the two Funds into the new Deposit Insurance Fund
–create a range of 1.15% to 1.40% within which FDIC can set the reserve ratio
–require minimum assessments for all institutions
–give FDIC flexibility in setting assessments
–provide for dividends if the new Fund exceeded 1.35%, and credits for
institutions insured in 1996
–increase coverage limits for individual accounts to $130,000
–index future coverage limits to inflation

–double coverage limits for certain types of retirement accounts and 401(k)s
–increase coverage for instate municipal deposits up to the lesser of $2 million or
$130,000 per account plus 80% greater than $130,000 (as in H.R. 453),
–increase credit union share insurance to conform to FDIC coverage, and,
–require studies of deposit and share insurance and related matters.
The Committee adopted an amendment of Representative Gonzalez requiring FDIC to
survey use of depository institutions by people without bank accounts. Dissent about
increasing coverage levels was evident. (We analyze that issue in CRS Report RL31463.)
H.R. 522 went to the floor of the House speedily. On April 2, 2003, the House
approved the bill by 411-11 vote. The legislation passed with generally strong support
from banking groups, with reservations about features that some believe crucially protect
deposit insurance against potential abuses. Industry advocates praised its merger of
FDIC’s two Funds. It would end the DRR of $1.25 for every $100 in insured deposits.
H.R. 522 would shift the ratio to a floating reserve range that could give regulatory
flexibility in making adjustments. H.R. 522 would require FDIC to provide certain banks
and thrifts with one-time credits against future assessments, based on their payments to
BIF or SAIF before 1997. It would increase account coverage from the current $100,000
to $130,000, indexing future coverage for inflation. That aspect generated opposition
from Federal Reserve Board Chairman Greenspan and Senate Banking Committee
Chairman Shelby. Along those lines, the Congressional Budget Office recently reported
that boosting the general coverage limit to $130,000 per account, combined with indexing
to inflation, would dramatically increase FDIC’s liability for future failures. Thus, $1.9
billion of increased spending (including some by the credit unions’ NCUSIF) to resolve
failures could occur over the next 10 years. Members defeated an amendment of
Representatives Ose and Maloney to remove that coverage increase, by voice vote.

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