First Republic was resolved via a purchase and assumption agreement with JPMorgan Chase Bank, which assumed
time since 1949. Large concentrations of uninsured deposits increase the potential for bank runs and can threaten financial stability. The report presents a fairly straightforward discussion of deposit insurance issues that will be familiar to all of you here today. Deposit insurance has two main objectives. One is to promote financial stability by making damaging bank runs less likely. Another objective is to protect small depositors. As of year-end 2022, more than 99 percent of deposit accounts in the U.S. were under the $250,000 deposit insurance limit.
REGULATION AND SUPERVISION PLAY AN IMPORTANT ROLE IN SUPPORTING THE FINANCIAL STABILITY OBJECTIVE OF DEPOSIT INSURANCE AND LIMITING RISK-TAKING THAT MAY RESULT FROM MORAL HAZARD.
all of the failed bank’s deposits and substantially all of the assets. This was done under the least- cost test and without a systemic risk exception. Implications for Deposit Insurance and Financial Stability
The three regional bank failures earlier this year illustrated a point I have made in previous speeches: while regional banks may not be as large, complex, and internationally active as the Global Systemically Important Banks — or G-SIBS as they are called — they pose distinct and significant challenges in resolution that could raise serious financial stability risks. In particular, the heavy reliance of regional banks on uninsured deposits for funding has the potential to create a destabilizing contagion effect on other banks if one regional bank were to fail and uninsured depositors took losses. Contagion can, and did, spread very quickly and well beyond its original source. The events of the spring raised questions about the role of deposit insurance in the U.S. banking system. As a step toward addressing these questions, on May 1, the FDIC released a report on “Options for Deposit Insurance Reform.” The report is a comprehensive overview of the deposit insurance system, its history and objectives, an assessment of the risks facing the system, and reform options for consideration to address those risks. The report deals with many of the issues IADI seeks to address in its Core Principles for Effective Deposit Insurance Systems (Core Principles) and the trade-offs all deposit insurers must face. First, the report analyzes relevant trends in deposits in the U.S. In particular, uninsured deposits have trended up over time and have increased the risk of bank runs. At their peak in 2021, the proportion of uninsured deposits in the banking system was almost 47 percent, higher than at any
While providing these benefits, deposit insurance can also lead to moral hazard and excessive risk-taking by making depositors less likely to care about the risks their banks are taking. Concerns about moral hazard can be addressed to some extent by certain design features of the system, such as limited coverage and risk-based premiums. However, the report highlights that the effectiveness of deposit insurance depends on how it interacts with other aspects of the banking regulatory system. Regulation and supervision play an important role in supporting the financial stability objective of deposit insurance and limiting risk-taking that may result from moral hazard. Capital and liquidity requirements, as well as supervision of interest rate risk management, rapid growth of assets and liabilities, and uninsured deposit concentrations are important examples. The report also discusses new tools that might be considered to complement deposit insurance system reforms such as a requirement that banks maintain an amount of long-term debt to absorb losses ahead of uninsured deposits. These are all matters under review in the U.S., and in some cases, action has already been taken. The report also looked at possible reforms to our deposit insurance arrangements, particularly with respect to coverage. The report considered three main options. The first is to raise the level of deposit insurance coverage.
22 INTERNATIONAL COLLABORATION
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