NCPA - National Center for Policy Analysis

Rethinking Which Accounts Qualify for Deposit Insurance

July 8, 2013

The Federal Deposit Insurance Corporation (FDIC), established by Congress in 1933, pledges to safeguard deposits through deposit insurance. The FDIC was created in response to the widespread bank failure of the Great Depression. It actively monitors the risk based capital ratios of insured banks and passively monitors banks by limiting the types and amounts of liabilities it will guarantee. The following are the five criteria for evaluating sources of bank funding and whether they qualify for insurance, says David Howden, an associate professor of economics at St. Louis University at its campus in Madrid, Spain.

  • The higher the interest rates, the higher the risks.
  • If deposits can be gathered quickly, they are unstable.
  • Good customer relationships lead to more stable deposits.
  • High liquidity in bank assets are good candidates.
  • Financial products with shorter maturities are more easily redeemed.

Brokered deposits are a deposit base that does not meet the FDIC definition of core deposits.  They arise when a third party places a client's money on demand or in short-term loans.

Removing FDIC insurance coverage from brokered accounts solves the following problems:

  • Seeking the highest returns possible.
  • Holding them accountable for losses.
  • Holding brokers accountable to their clients in reporting the real risk of investing in riskier activities.
  • Allowing banks to utilize brokered deposits as a funding source.
  • Enticing investors to hold their cash requirements in core deposits.

Uninsured brokered deposits reaffirm market discipline and increase stability, making banks rely on a stable deposit base to finance their lending activities.

Source: David Howden, "Rethinking Which Accounts Qualify for Deposit Insurance," Mercatus Center, June 18, 2013.


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