Recent Reforms of the Deposit Insurance System in the United States: Reasons, Results, and Recommendations for the European Union

The US deposit insurance system (managed by the Federal Deposit Insurance Corporation – FDIC) has been established in 1933 to ensure the safety of deposited money and the overall stability of the banking sector. Although over decades the system proved to be successful in accomplishing those goals, there were some discussions and efforts in the 2000s to reform it further. And indeed, it was reformed twice – in 2005-2007 and 2008-2009. But there was a fundamental difference between those reforms: the former had been carried out at a time of very good economic and financial conditions (strong economic growth, wealthy banking system, etc.) while the latter was prompted by a serious crisis situation (similarly like the reforms following the 1920-30s and 1980-90s crises). The paper is mostly related to the United States. It first outlines the main features of the US deposit insurance system prior to the recent reforms. Then, the paper presents the reasons and results of the 2005-2007 reform of the deposit insurance system in the United States. The results are relating to merging the former insurance funds into a new one, providing the FDIC with greater flexibility in managing the fund and in setting risk-based premiums, maintaining the standard coverage limit at $ 100,000 but increasing the coverage limit for retirement accounts to $ 250,000, and indexing both to inflation, etc. Next, the paper presents the 2008-2009 reform that was prompted by the aggravation of the current financial crisis (which had been started by the US subprime mortgage crisis in 2007). It discusses two main elements of this reform, i.e. temporary increasing the standard coverage limit to $ 250,000 and the restoration plan in order to restore the fund’s reserve ratio to the required level. Moreover, the paper discusses some potential changes to the US deposit insurance system that could be implemented in the future – suggesting that, even after the recent reforms, there is still some room for further reforming the system. Finally, there is also a chapter relating to the European Union. In 2005-2006, the EU conducted the review of the directive on deposit guarantee schemes (adopted in 1994), but it concluded that there was no need to amend it. The financial turmoil, which started in the US and had serious impact in Europe in 2007 and 2008, caused much more urgency to reforming the EU deposit guarantee schemes. Thus, the paper presents the recent amendments to the directive (proposed in October 2008 and finally adopted in March 2009) that had been prompted by the aggravation of the current global financial crisis (in September 2008), as well as some potential changes to be discussed in the near future. It discusses the following issues: increasing coverage levels to € 50,000 and € 100,000, abandoning co-insurance, speeding up payouts, risk-based premiums, funding mechanisms, a pan-EU deposit guarantee scheme, potential roles of deposit insurers in early intervention and bank resolution, depositor awareness and literacy, etc. The paper includes some recommendations for the EU (e.g. € 100,000, € 200,000, and € 500,000 as fixed harmonized levels for standard deposits, retirement accounts, and temporary high balances respectively) based on the recent reforms of the US deposit insurance system (as well as some solutions adopted or proposed recently in the UK).