WASHINGTON — Just as small banks lost the argument that the government should cover significantly more than $100,000 in a general deposit account, the Federal Deposit Insurance Corp. has also shed doubt on the idea of voluntary extra coverage by public or private entities.
In a study published Thursday in FDIC Quarterly, the agency said increased profits and stability since the savings and loan crisis have led to weaker demand for voluntary coverage.
The report further contends that the market has provided institutions with other options, including services that divvy up large deposits into smaller increments at multiple banks that qualify for full FDIC coverage. A separate article in FDIC Quarterly counters misconceptions about modifying troubled subprime mortgages.
The deposit insurance study said the FDIC could provide its own form of voluntary coverage, but it said that would have complications, including the possible need of private reinsurance to help the agency handle the additional risk.
"Private sector interest in providing excess deposit insurance, as reinsurers of FDIC exposure or as direct providers of excess deposit insurance, appears limited," the report's authors, FDIC analysts Christine M. Bradley and Valentine V. Craig, concluded.
Despite the study's findings — originally reported to Congress last February as a requirement of the 2006 deposit insurance reform law — the market for voluntary excess coverage has several players, and it expanded in June with the entrance of Progressive Casualty Insurance Co.
The study said other providers whose products allow banks to give depositors extra coverage are BancInsure, St. Paul Travelers, and Kansas Bankers Surety Co. Private firms typically make extra coverage available through deposit insurance bonds, as well as with support from outside reinsurers. Progressive, which unveiled its product after the FDIC sent Congress its report, announced Wednesday that it was raising excess deposit insurance coverage for individual banks from $5 million to $15 million. (A participating bank can allocate that coverage among large depositors.)
"In certain circumstances, it brings comfort to some depositors that want to deposit more than $100,000 into a single bank," said Tom Hruby, a product manager with Progressive.
But the report said there has not been much interest in voluntary excess insurance. It said firms such as Centrex of Memphis began sprouting up in the late 1980s and early 1990s to provide extra coverage during the then-banking crisis, but "Centrex found that the demand for the product fell below original expectations" after conditions recovered.
The study came after some banks lost out on an effort to include in the 2006 reform law a measure to increase the FDIC's standard coverage as high as 100%. But the final law increased the coverage limit on certain retirement accounts to $250,000 while indexing the $100,000 limit to inflation.
If Congress wanted the FDIC to encourage more forms of voluntary coverage, the study said, the agency either could offer its own form of voluntary coverage — charging interested banks a higher premium and possibly buying private reinsurance to relieve the FDIC of some of the extra risk — or rely on the private market.
The authors added that if the FDIC offered its own product, it would potentially limit it to well-managed and well-capitalized institutions, cap the coverage available, and develop a new pricing system for charging banks.
The study referred to other options for banks besides voluntary excess coverage. Deposit-placement services, for example, allow banks to divide large deposits into smaller certificates of deposit held by a network of banks.
Mark Jacobsen, the president and chief operating officer of Promontory Interfinancial Network, which offers such a CD service with coverage of up to $50 million per depositor, said interest in the product has picked up recently.
"CDs have become remarkably more popular both as a funding alternative for banks and as a safe investment for investors," he said. "We've seen a substantial increase in our business over the last quarter."
In a fall issue of FDIC Quarterly, the agency similarly argued against replacing FDIC insurance with private insurers. The 2006 reform law also required a report to Congress on such privatization.
