Order Code RS21987
Updated October 26, 2006
CRS Report for Congress
Received through the CRS Web
When Financial Businesses Fail:
Protection for Account Holders
Walter W. Eubanks
Specialist in Economic Policy
Government and Finance Division
Summary
Lawmakers have long recognized the importance of protecting some forms of
financial savings from risk. Such vehicles clearly include deposits in banks and thrift
institutions and credit union “shares.” Remedial and other safety net features also cover
insurance contracts, certain securities accounts, and even defined-benefit pensions.
Questions over how to fund and guarantee Social Security, along with the troubles of
the Pension Benefit Guaranty Corporation, have renewed interest in these arrangements.
This report portrays the salient features and legislation of account protection provided
by the Federal Deposit Insurance Corporation, the National Credit Union Share
Insurance Fund, state insurance guaranty funds, the Securities Investor Protection
Corporation, and the Pension Benefit Guaranty Corporation. It provides resources for
further analysis of each protective arrangement and will be updated as appropriate.
Analysis
Analysts and lawmakers view many financial businesses as having an important role
in the U.S. economy, receiving protection for their individual account holders against loss,
should the firms fail. Such protections exist both to protect the individuals from risks
they probably could not discern for themselves, and to protect the economy against the
effects of financial panics if failures occur. Panics, the attendant collapses of wealth, and
severe consequences for the economy occurred before Congress created federal deposit
insurance in 1934. Government policy protects customers of depository institutions —
banks, thrift institutions, and credit unions — in full for accounts up to $100,000 and up
to $250,000 for retirement accounts. In addition, customers of insurance companies,
securities broker/dealers, and many pension funds receive government or government-
sponsored guarantees on specified accounts.
This report provides a side-by-side summary of the major features of financial
institutions’ customer protection systems, reflecting safety-net provisions legislated over
time, usually in reaction to specific collapses. Besides these explicit guarantees,
regulatory bodies can attempt the rescue of failing financial enterprises, using many tools
Congressional Research Service ˜ The Library of Congress

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authorized by laws and regulations and often acting in the background. Such tools include
liquidity lending, arranging memoranda of understanding, issuing cease and desist orders
against risky practices, and arranging mergers of weak entities into stronger institutions.
If the entire financial economy seems threatened by pending collapse of either a sizeable
financial institution that is “too large to fail,” or many financial businesses collectively,
the Federal Reserve (Fed) can step in as the lender of last resort to avert serious adverse
consequences for the economy (e.g., use of the Fed’s liberal bank liquidity policy
immediately after the 911 attacks). Moreover, Congress may have to provide emergency
funding when parts of the federal safety net are under severe pressure. The cleanup of the
savings and loan industry in the 1980s and early 1990s, for example, required
appropriated funds plus a new deposit insurance fund and regulator. Currently, severely
underfunded defined benefit pension plans of steel, airline, and similar businesses suggest
that the Pension Benefit Guaranty Corporation may require much future federal
assistance.1
An important conceptual distinction between support structures is who ultimately
pays for the protection. Lawmakers originally created federal deposit insurance in a “user
fee” model of insurance, in which the government owned and operated each insurance
system and charged member banks for its use. Following the banking failures of the late
20th century, legislation moved deposit protection part way toward an alternative “mutual”
model, in which the burden of financing the system falls more clearly on the banking
industry. Mutual institutions are owned by their customers, such as saving associations’
depositors and insurance companies’ policyholders. As a result, some analysts now claim
that the banking industry “owns” the deposit insurance funds in mutual mode. In reality,
the federal government still owns and operates them. That is so because in all depository
institution cases, the ultimate guarantor is the economic power of the federal government.
History has shown that deposit guarantees short of the federal level have universally been
inadequate to prevent panics, runs, and severe economic damage when called upon.2
Industry-sponsored and state-level programs have contained the collapses of their covered
entities only if the damages have been small. Credit union share insurance, in contrast,
more nearly follows the mutual model. Likewise, state insurance company guaranty and
federally-sponsored securities investor protection arrangements follow the mutual model.
The troubled pension benefit arrangement, however, remains in user fee mode.
The following tabulation lists the major elements and components of these safety
nets. Table 1 outlines the support structures for accounts at depository institutions.
Table 2 does the same for the nondepository supports. Readers may obtain further
analysis of each system in the CRS reports cited for further reading, or via the websites
of the administering agencies noted.
1 See the CRS Current Legislative Issue entry, Pension Security and Retirement Savings, at
[http://beta.crs.gov/cli/cli.aspx?PRDS_CLI_ITEM_ID=446].
2 CRS Report RL31552, Deposit Insurance: The Government’s Role and Its Implications for
Funding, by Gillian Garcia, William Jackson, and Barbara Miles.

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Table 1. Comparing Account Protection: Depository Institutions
Bank
Thrift Institution
Credit Union
Feature
Deposits
Deposits
Shares
Statutory
Federal Deposit
Same
Federal Credit Union
Authority
Insurance Act
Act (Amendment)
Original Date/
1933/1991
1934/1989/1991
1970
Major
Modification
Citations to
64 Stat. 873;
Same
84 Stat. 994;
Authority and
12 U.S.C. 1811 ff.
12 U.S.C. 1781 ff.
Operations
Administrator
Independent agency:
Independent agency:
Independent agency:
Federal Deposit
Federal Deposit
National Credit
Insurance
Insurance
Union
Corporation’s
Corporation’s
Administration
Bank Insurance
Savings Association
manages National
Fund.
Insurance Fund.
Credit Union Share
Insurance Fund.
Funding
Banks pay
Same
All federal and
assessments on
electing states may
deposits to maintain
pay assessments;
fund balance:
none recently.
currently zero for all
Contribution of 1%
but riskiest firms.
of credit union
“shares” required.
Federal
Part of consolidated
Same
Members own off-
Budgetary Status
federal budget.
budget fund.
Federal
$30 billion line of
Same
$100 million line of
Government
credit with U.S.
credit with U.S.
Backstop
Treasury; “full faith
Treasury; “full faith
and credit of the
and credit of the
United States.”
United States.”
Risk-based
Yes: a few cents
Same No
Assessment
more per $100 of
covered deposits.
Tax Deduction
Yes: Business
Same
None usually since
for Assessment
expense deduction
credit unions are
for taxes.
exempt from federal
and most state taxes.
Product Line
None
None
None
Differentiation
Coverage Limit
$100,000 per
Same
Same
account, and $250,
000 for retirement
accounts.
Source: Congressional Research Service, The Library of Congress.

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Table 2. Comparing Account Protection: Nondepository Institutions
Feature
Insurance Policies
Securities Accounts
Pension Accounts
Statutory
State laws;
Securities Investor
Employee
Authority
McCarran-Ferguson
Protection Act of
Retirement Income
Act (59 Stat. 33,
1970
Security Act of
1945) removed most
1974; Consolidated
federal industry
Appropriations Act,
involvement.
2001.
Original Date/
Various.
1970
1974/1994/2000
Major
Modification
Citations to
State laws.
84 Stat. 1636;
88 Stat. 829;
Authority and
15 U.S.C. 78aaa ff.
29 U.S.C. 1001 ff.
Operations
Administrator
Multi state
Non-governmental
“Self-supporting”
administrators and
membership
federal government
non-profit
corporation, funded
corporation: Pension
associations of
by member
Benefit Guaranty
licensed insurers;
securities broker-
Corporation.
coordinated via
dealers: Securities
National Association
Investor Protection
of Insurance
Corporation.
Commissioners and
National Conference
of Insurance
Legislators.
Funding
Licensed direct
Assessments on
Employers pay
insurers pay after
members for
annual premium per
actual insolvency; no
“reserve” fund
participant: $19
funds(s) generally
advancing payments
minimum in single-
exist.
to claimants: flat
employer/$2.60 flat
$150 yearly per firm.
in multi-employer
Corporation may
plans.
levy revenue-based
assessment, as in
1989 — 1995.
Federal
Not applicable.
Not a budgetary
On-budget.
Budgetary Status
account.
Federal
None, except for a
May borrow $1
Borrowing or
Government
program of terrorism
billion from U.S.
appropriation has
Backstop
reinsurance.
Treasury Department
not covered fund
through Securities
deficits; lacks “full
and Exchange
faith and credit”
Commission; lacks
backup.
“full faith and credit”
backup.

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Feature
Insurance Policies
Securities Accounts
Pension Accounts
Risk-based
No.
No.
Yes: Underfunded
Assessment
single-employer
plans pay extra
$9/1,000 on
unfunded vested
benefits, varying
with interest rates
Tax Deduction of
Yes: Life insurers in
Essentially not
Yes: Employers’
Assessment
45 states and
applicable, although
business expense
property-liability
business expense tax
deduction for federal
insurers in 20 may
deduction is
and state taxes.
deduct assessments
nominally available.
from premium taxes;
business expense
deduction for federal
and state taxes.
Product Line
Insurers are assessed
None.
Program for single-
Differentiation
by market share in
employer plans;
particular types of
another for multi-
insurance.
employer plans.
Coverage Limit
Coverage limits vary
Stocks, bonds, and
Varies. Single-
by state
cash registered to
employer plan basic
holders in closed
benefits to $3,801
broker/dealers;
monthly for retirees
$500,000 of which
starting at age 65,
$100,000 may be
adjusted for age and
cash; not protected
inflation. Multi-
against changing
employer plan
market values.
formula is 100% of
first $11 of monthly
benefits per year of
service plus 75% of
the next $33 of such
benefits, not
adjusted.
Source: Congressional Research Service, The Library of Congress.

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For Further Reading
CRS Report RS21719, Bank and Thrift Deposit Insurance Premiums: The Record from
1934 to 2004, by Barbara Miles and William Jackson.
CRS Report RL31552, Deposit Insurance: The Government’s Role and its Implications
for Funding, by Gillian Garcia, William Jackson, and Barbara Miles.
CRS Report RS20724, Federal Deposit and Share Insurance: Proposals for Change, by
William Jackson.
CRS Report RL32175, Insurance Guaranty Funds, by Carolyn Cobb.
CRS Report 95-118, Pension Benefit Guaranty Corporation: A Fact Sheet, by Paul
Graney.
CRS Report RS21741, Securities Investor Protection Corporation, by William Jackson
and Gary Shorter.
CRS Report RS21979, Terrorism Risk Insurance: An Overview, by Baird Webel.

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