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Inactive Financial Institution Letters

Federal Deposit Insurance Corporation 550 17th Street NW, Washington, DC 20429 Office of the Chairman


September 11, 2000

SUBJECT: Deposit Insurance Options Paper

The federal deposit insurance system turned 67 years old in June, and it has served our country well. As the banking business changes, however, we want to ensure that our system remains the world's best. The FDIC is reviewing ways to improve the deposit insurance program and we would like your comments. As part of our review, we have prepared the enclosed options paper.

The paper focuses on three fundamental functions within the insurance program: the processes for pricing risks, funding insurance losses, and setting coverage limits. We are seeking analysis and comment from individuals and organizations that have an interest in the issues.

  • In discussing the pricing of risk posed to the insurance funds, the paper considers ways to better differentiate levels of risk and appetite for risk among institutions. A new pricing system might make better use of market data, additional supervisory and Call Report information, as well as the internal risk-management data collected by financial institutions themselves. Beyond that, we discuss the possibility of using capital market instruments, similar to credit default swaps, to consider how the market would price the risk exposures of the insurance funds.

  • The paper's review of processes for funding insurance losses discusses whether the system should be viewed as a mutual model or a user-fee model. A mutual system gives banks a claim on past premiums and thus allows for rebates. Under the user-fee model, premiums are viewed as a price for service, and banks would have no claim on past premiums. The paper also considers methods for placing more emphasis on premium stability and less on fund ratio stability under either approach.

  • Lastly, the paper considers changes in depositor insurance coverage, and whether depositors would benefit from the establishment of a more predictable, mechanistic method for setting coverage levels. One way would be to tie the coverage limit to some index for inflation.

Because the paper is not intended to advocate a specific approach, but rather, to solicit comments, we have presented a wide range of broad alternatives. We have included examples of how these alternatives might work in practice, and encourage you to comment both on the specific examples and on alternative approaches.

We are undertaking a comprehensive deposit insurance review to assure the ability of the system to meet its responsibilities over the next decade. Industry consolidation, expanded activities, globalization and the use of technology have advanced the business of banking and the products and services offered to American depositors. The FDIC wants to ensure that the deposit insurance system continues to protect depositors and contributes to its full extent to the stability of the banking system.

The paper invites all interested parties to comment at the FDIC's Web site, The Internet version of the paper includes a survey. Comments may also be addressed to Robert E. Feldman, Executive Secretary, Attention: Comments/OES, Federal Deposit Insurance Corporation, 550 17th Street, NW, Washington, DC 20429, or hand-delivered to the guard station at the rear of the 550 17th Street building (located on F Street) between 7:00 a.m. and 5:00 p.m. on business days. In addition, comments may be faxed to (202) 898-3838 or e-mailed to At present, we have not set a closing date for comments.

The Corporation will review comments as they are received and summarize them each month. You also may inspect and photocopy comments at the FDIC Public Information Center, Room 100, 801 17th Street, NW, Washington, DC, between 9:00 a.m. and 4:30 p.m. on business days.

The FDIC will carefully review comments and weigh feedback from the options paper to narrow the policy choices and guide the additional analytical work necessary to develop a set of policy recommendations that is appropriately balanced, workable and fair. As the FDIC and other interested parties complete surveys and studies on the topic, we will arrange additional discussions - perhaps a new set of roundtables or outreach meetings - with interested parties.

Donna A. Tanoue

Attachment: Options Paper HTML or PDF (482 KB File - PDF Help or Hard Copy)

Distribution: FDIC-Insured Banks, Savings Associations and Branches of Foreign Banks

NOTE: Paper copies of FDIC financial institution letters may be obtained through the FDIC's Public Information Center, 801 17th Street, NW, Room 100, Washington, DC 20434 (800-276-6003 or (703) 562-2200).

Last Updated 09/11/2000

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