Regulation by Deposit Insurance

Abstract

The fact that the nation has three banking regulators poses challenges to the Federal Deposit Insurance Corporation (FDIC) in carrying out its statutory mandates. The agency relies on other regulators with their own priorities to limit the risks that banks take, to require holding companies to take losses before the FDIC in case banks fail, and to enforce the FDIC's regulations. Moreover, the FDIC cannot enact its preferred policies if those other regulators disagree if it wishes to avoid a regulatory race-to-the-bottom.

This article proposes a novel solution to this well-known problem: Regulation by deposit insurance. The FDIC should set deposit insurance assessment rates in ways that mitigate its reliance on other regulators. It can, for example, offer insurance discounts to banks that take risk- and loss-mitigating actions their primary federal regulators will not require, and that comply with FDIC regulations facilitating its insurance and resolution activities. Adoption of this proposal would not only help ensure compliance with the FDIC's preferred regulatory standards, but also provides for more accurate insurance assessments.