The Limited Impact of Unlimited Deposit Insurance

Analysis of the temporary unlimited deposit insurance coverage for noninterest-bearing transaction accounts (NIBTAs) shows that this program had a greater psychological than practical impact on deposit customers. Therefore, it is not very likely that institutions will see a substantial change in deposit behavior after the expiration of the program on December 31.

Looking at the year and a half of reported FDIC data, from the enactment of the program on December 31, 2010 until June 30, 2012, the increase in the average balance per NIBTA over $250,000 was only 25% compared with an increase of 11% in the average balance of all deposit accounts (checking, savings, money markets and certificates of deposit) over $250,000. Thus, the marginal increase in the average balance of NIBTAs was only 14%.

During the 18 months following the enactment of the program until June 30, 2012, balances of all deposit accounts exceeding the $250,000 limit increased by $934 billion, or 30.2%, compared with an increase of $560 billion, or 55.1%, in balances of NIBTAs over $250,000. Here, again, we see that the marginal increase of program balances vs. “normal” balances is only about 25%.

Additionally, during the same time period, the number of NIBTAs exceeding the $250,000 limit increased by 149,347 compared to an increase of 427,119 in all deposit accounts exceeding the limit. This means that 65% of all deposit accounts over $250,000 would have exceeded the insurance limit even if the unlimited insurance program did not exist.

Based on the ratio of 35% program growth vs. 65% “normal” growth in balances of deposit accounts over $250,000, it is reasonable to conclude that section 343 of the Dodd-Frank Act had a marginal impact on reassuring customers about the safety of their deposits over and beyond the confidence level customers have in FDIC-insured institutions under normal circumstances.

Mr. Geller is the executive vice president of San Anselmo, Calif.-based Market Rates Insight, which provides competitive research and analytics to financial institutions. He can be reached at [email protected].