In the wake of this year’s banking crisis, the Federal Deposit Insurance Corporation (FDIC) is pressing banks to fix the way they report uninsured deposits, or those that exceed the agency’s $250,000 insurance limit.
In a statement, the FDIC said that certain banks “are not reporting uninsured deposits in accordance with the Instructions to the Consolidated Reports of Condition and Income.” In particular, the agency singled out the practice of banks excluding uninsured deposits backed by collateral, leading banks to understate the total amount of uninsured deposits. The agency did not single out any bank in particular.
Under the FDIC’s instructions, banks must report all uninsured deposits, including those backed by collateral. The FDIC instructs banks to “make a reasonable estimate of the portion of these [uninsured] deposits using available data.”
Uninsured deposits are those that exceed the FDIC’s $250,000 insurable limit, a limit that was established in 2010 with the Dodd-Frank Act. It’s been raised periodically since the FDIC was created in 1933 as a means of protecting depositors in the wake of bank failures during the Great Depression.
How Uninsured Deposits Fueled This Year’s Banking Crisis
Uninsured deposits played a leading role in this year’s banking crisis, as the banks that went under—Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank—were those with the highest share of uninsured deposits relative to total deposits.
Leading up to their collapse, more than 90% of all deposits at Silicon Valley and Signature banks—and 68% of those at First Republic—were uninsured, a reflection of the banks’ wealthy client base that parked large sums of money with the lenders. When rising interest rates and declining mortgage portfolios led to financial losses, panic quickly ensued, leading to massive outflows as depositors quickly withdrew their money in a run on the banks.
Deposits at First Republic Bank plunged by more than 50% in the first quarter, not including a $30 billion liquidity injection by 11 of the nation’s biggest banks in late March, weeks before First Republic was eventually taken over by the FDIC and sold to JPMorgan Chase on May 1.
Legislators Call for Higher Provisions
While deposits exceeding $250,000 are not insured by the FDIC under normal circumstances, federal regulators made multiple exceptions during the banking crisis, with the biggest account holders in the three failed banks also getting their money back.
Federal lawmakers have stepped up calls for more stringent regulation of the banking industry, and discussed setting higher provisions for uninsured deposits. Shortly after the first wave of bank failures in March, Treasury Secretary Janet Yellen floated the idea of covering uninsured deposits at other banks, and said that the decision to insure all depositors at SVB and Signature banks “reduced the risk of further bank failures that would have imposed losses on the [FDIC’s] Deposit Insurance Fund, which is paid for through fees on insured banks.”
