Washington, D.C. – A new analysis from the American Action Forum (AAF) argues against expanding federal deposit insurance, even as calls for increased coverage gain traction following recent banking sector instability. AAF Director of Financial Services Thomas Kingsley’s primer details the history of deposit insurance in the U.S.,examines current legislative proposals,adn warns that broadening coverage - particularly to unlimited amounts - woudl be detrimental to financial stability.
The report explains that deposit insurance is a cornerstone of the modern U.S.banking system, but is increasingly at the center of debates surrounding risk management, regulation, and moral hazard. Kingsley’s research traces the evolution of deposit insurance, highlighting its crucial role in preventing bank runs and maintaining public confidence.
However, Kingsley cautions against the temptation to simply increase coverage limits in response to market anxieties. “Deposit insurance plays a vital role in financial stability, but its scope must be clearly limited and carefully designed,” he writes. “Calls to expand deposit coverage may be politically expedient during moments of market panic, but they threaten to erode the basic tradeoff between risk and accountability in the banking sector.”
Rather of expanding guarantees,the AAF recommends a focus on strengthening bank supervision,improving resolution planning for failing institutions,and developing effective crisis management tools. Kingsley asserts that expanding deposit insurance is “a seductive but ultimately misguided solution-far beyond a solution looking for a problem, most of these proposals represent the cure being worse than the illness.”
The full analysis is available at https://www.americanactionforum.org/insight/deposit-insurance-a-primer/.
