Deposit Insurance: Observations on Approaching Reform

GAO discussed the key issues concerning deposit insurance reform. GAO believes that Congress needs to determine: (1) the relative roles of investment discipline and regulatory oversight in protecting depositors; (2) special investment choices and protection that regulators and insurers can offer large banking institutions; (3) how to define various types of deposits in determining appropriate levels of insurance protection; (4) whether traditionally uninsured institutions, including overseas banks and non-depository entities, should receive insurance protection; (5) the complex relationship between insurance protection levels and deposit insurance costs; (6) the extent to which regulation should impose limits on the uses of insured deposits or broaden banking powers to diversify financial risk; (7) how depositors would respond to lower yields resulting from limits on high-risk investments; and (8) improving the regulatory system through new requirements for regulators and bank managers.