Private Deposit Insurance Can Help Challenge Federal Deposit Insurance Monopoly 

Federal deposit insurance operates as a monopoly. The U.S. financial system has guaranteed deposits at banks since 1934. This system was supposed to prevent bank runs by instilling confidence in depositors, assuring them that their money would be safe in the event of a bank failure. The downside of this policy is that it essentially forces banks to pay for deposit insurance if they wish to serve depositors with little flexibility to opt out or tailor their deposit insurance coverage. 

With no private sector alternatives, federally insured institutions have no choice but to accept the uniform $250,000 deposit insurance guarantee for each account and pay the applicable quarterly premiums. The lack of flexibility in insurance options for banks should be addressed considering the average transaction account balance in the United States is only approximately $8,000 according to the Federal Reserve and evidence shows that 99% of accounts are covered under the current FDIC insurance limit.  

Additionally, being FDIC insured carries the burden of being regulated and supervised by the FDIC. Some banks have more than one regulator and often find themselves reporting and fulfilling duplicative compliance mandates as a result. While no legislation exists yet to remedy this issue for federally chartered banks and credit unions, state-chartered credit unions in certain states have the opportunity to opt out of federal insurance in favor of private deposit insurance.  

The results of a new study make an optimistic case for private sector deposit insurance as a viable alternative to federal insurance. Private deposit insurance holds a decades-long track record of effective coverage. 

One provider in the private deposit insurance space, American Share Insurance (ASI), has insured member credit union deposits across ten states for over fifty years. Since its inception in 1974, not a single member has ever lost money in an ASI-insured account.  

The private sector model is as financially resilient as, if not more than, its federal counterpart. ASI’s loss-absorbing capital, which is the ratio of the fund’s capital to total insured deposits, stands at 1.75% of insured shares, compared to 1.31% for the National Credit Union Administration’s (NCUA) Share Insurance Fund and 1.43% for the FDIC’s Deposit Insurance Fund. ASI-insured credit unions also carry a weighted average net worth ratio of 11.6%, compared to 11.1% for federally insured credit unions, a 50 basis-point difference that is considered significant based on industry standards. Private oversight, selective underwriting, and geographic diversification across member institutions help drive stronger balance sheets without government regulation.   

The private deposit insurance model works because it helps mitigate moral hazard. When institutions enter membership in a private insurance fund, each member has a direct financial stake in the health of every other. Private insurers maintain the authority to require recapitalization for members before problems spiral out of control. Because there is no implicit federal backstop, members cannot free-ride on the assumption of a government rescue.  

Other cases of private deposit insurance organizations have an excellent track record as well. The Massachusetts Depositors Insurance Fund (DIF) offers additional evidence. This private, industry-sponsored insurer for Massachusetts savings banks provides deposit insurance coverage above FDIC limits for certain Massachusetts-chartered banks. Since its inception in 1934, not a single depositor has lost money in a Massachusetts DIF member bank.   

The federal system transfers costs directly to consumers when problems emerge. The 2023 failures of Silicon Valley Bank, Signature Bank, and First Republic Bank imposed an estimated $40.4 billion loss on the FDIC’s Deposit Insurance Fund. The resulting special assessment hit the largest banks with an average income reduction of over 20% in Q4 2023, costs that banks routinely pass downstream to depositors through lower rates and borrowers through higher fees. Additionally, federal supervision did not help to prevent SVB’s collapse. Federal Reserve examiners were asleep at the wheel as revealed in the Fed’s report on SVB’s collapse. Despite having failed internal liquidity tests and receiving three times as many supervisory warnings as peer institutions, the Fed did nothing to reprimand the bank for its compounding internal failures. More regulation is clearly not the answer when regulators are unable to implement the ones already on the books.  

Current proposals, such as the Main Street Depositor Protection, offer to raise insurance limits to $5 million and would only exacerbate systemic risk and fail to prevent bank failures. Deposit insurance is a postmortem consumer protection that exists to cover depositors in the case of a bank failure; it is not an adequate preventive mechanism designed to stop bank runs or stem deposit outflows.  

One recently proposed bill that would help expand this market is the Private Insurance Parity Act, cosponsored by Senators Bernie Moreno (R-OH) and Catherine Cortez Masto (D-NV). The bill would lower the regulatory barriers for credit unions to adopt private deposit insurance or merge with privately insured credit unions. ATR encourages lawmakers to support the Private Insurance Parity Act. Encouraging a free and competitive market in this space would help promote bank discipline, encourage safe and sound practices, and keep the question of a bailout off taxpayers’ backs.