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FDIC proposes higher insurance coverage for payroll accounts

Written on May 3, 2023

The Federal Deposit Insurance Corp. said it supports a revamp of its deposit insurance program that would give business payment accounts higher coverage than other types of accounts. 

The proposal is one of three options the agency highlighted in its overview of the deposit insurance program and comes less than two months after federal regulators took extraordinary measures to backstop the deposits of failed Silicon Valley Bank and Signature in an effort to stem contagion in the banking sector. 

“Business payment accounts pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects,” FDIC Chair Martin Gruenberg said in a statement. 

Under the agency’s targeted coverage scenario, accounts used for payment purposes — specifically business payment accounts — would merit higher deposit insurance coverage. 

Amid bank solvency concerns, depositors could move their deposits to an account with higher coverage within the same bank, the FDIC said. Allowing depositors to obtain more insurance by moving deposits across accounts within the same bank could help prevent future panic-driven bank runs, the regulator added. 

Any changes to deposit insurance coverage levels would require congressional action, FDIC officials noted. 

The report on deposit insurance reform also analyzed the option of maintaining limited coverage — possibly higher than the current $250,000 cap — as well as extending unlimited coverage to all depositors.  

The agency endorsed targeted coverage as the most promising option, but didn’t specify a cap. 

The targeted option would be similar to the Transaction Account Guarantee program that was rolled out during the 2008 financial crisis to address distress at several large banks, the FDIC said. 

The program, which temporarily guaranteed deposits in all non-interest-bearing transaction accounts, “served the needs of businesses, nonprofit organizations, government municipalities, and other entities that needed ongoing use of large deposit amounts,” the FDIC said.