Treasury, Fed See No Need to Raise Bank Insurance Cap

Policymakers at the Treasury Department and the Federal Reserve agreed Thursday on the need to overhaul the nation’s bank deposit insurance system, but declined to support a proposal to raise the $100,000 limit on coverage of individual accounts.

“We see no evidence that the current limit on deposit insurance coverage is burdensome to consumers. Nor do we see evidence that increasing coverage across the board would enhance competition in the banking industry,” Sheila Bair, Treasury’s assistant secretary for financial institutions, said in remarks prepared to be delivered to the House Financial Services Committee.

The idea of indexing the cap on deposit coverage to inflation had been raised by the Federal Deposit Insurance Corp. in a report released in April. It is supported by small banks and thrifts that believe a higher limit would allow them to better compete for deposits with their larger competitors.

The FDIC’s key recommendations included: indexing the currently fixed coverage limit to inflation, merging the separate insurance funds that back bank and thrift deposits, replacing the rigid target level now set for those funds with a flexible range, and allowing banks--which pay premiums to finance the system--to get money back as the funds grow.

The Treasury and the Fed broadly agreed with most of those ideas, though with reservations on the details.

Federal Reserve Board Governor Laurence Meyer, testifying on behalf of the central bank, echoed Bair’s assessment on raising the coverage level.

“In the board’s judgment, it is unlikely that increased coverage, even by indexing, today would add measurably to the stability of the banking system,” he said in prepared remarks.

The FDIC has argued that means banks would be required to pay more in premiums at precisely the time when they would be able to least afford it, and are free to pay no premiums when times are good.

Both Bair and Meyer supported the idea that all banks, no matter their risk profile, be required to pay regular premiums to the FDIC.

“Banks and thrifts benefit every day from deposit insurance and they should compensate the FDIC for that benefit, preferably through relatively small, steady premiums,” Bair said.