Rethinking deposit insurance on brokered deposits

David Howden

Journal of Banking Regulation, 2015, vol. 16, issue 3, 188-200

Abstract: In a bid to understand how the Federal Deposit Insurance Corporation (FDIC) can aid in promoting financial stability, economists have recently called the definition of core deposits into question. Deposit insurance is extended to core deposits because they represent the stable funding base that the banking system relies on for liquidity. The criteria used by the FDIC to determine whether a funding source is insurable are not consistent with any objective criteria available to define core deposits. Herein I assess current FDIC criteria and whether the kinds of deposits currently insured are good candidates for coverage. I find brokered deposits to be particularly ill-suited to insurance. The FDIC could further promote banking-system stability while simultaneously reducing potential costs by ending its extension of insurance to brokered deposits.

Date: 2015
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