This could provide more protection for savers, but it would likely do little to address the financial stability and contagion risks that we experienced. That is because uninsured deposits are held by relatively few depositors: they account for 40% of all domestic deposits but are held by only one percent of depositors. Raising the limit by even a significant amount would do little to change this. A second option would be to provide unlimited coverage. This would effectively remove run risks as insurance backed by the federal government provides a strong deterrent to bank runs. However, it also would exacerbate moral hazard by removing depositor discipline and may have unintended broader financial market effects. It would also dramatically increase the cost of deposit insurance to the banking industry. The third option would be targeted coverage which would allow for different levels of deposit insurance coverage across different types of accounts. In particular, it would focus on higher coverage levels for business payment accounts. Business payment accounts may pose a lower risk of moral hazard because those account holders are
less likely to view their deposits using a risk-return tradeoff than a depositor using the account for savings and investment purposes. At the same time, business payment accounts may pose greater financial stability concerns than other accounts given that the inability to access these accounts can result in broader economic effects from the failure to make payrolls that might be mitigated by higher deposit insurance coverage. However, there are challenges in targeted coverage around establishing a practical definition for accounts that merit higher coverage while limiting the ability of depositors and banks to circumvent those distinctions. Any change in deposit insurance coverage in the United States would require legislation by the Congress. While there was considerable interest in the immediate aftermath of the bank failures earlier this year, that has dissipated with time. At this point there does not seem to be any imminent likelihood of changes to deposit insurance coverage in the U.S.
2023 ANNUAL REPORT 23
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