Large Bank Supervision Forum eBook

Internal Use Only

Should the FDIC insure all deposits . . .

 Insuring all deposits will reduce the runoff risk experienced during the March 2023 banking crisis by increasing consumer confidence and reducing the contagion associated with reputational risk.  This can be achieved in two ways – 1. The FDIC enhances insurance limits to insure all deposits. − Deposits over $250 thousand will receive a higher insurance premium than traditional insured deposits to price in the risk. This should be equivalent to the cost of Intrafi or 12 to 15 basis points. 2. The industry makes a concerted effort to move all uninsured deposits into private insurance solutions − Intrafi provides a low-cost insurance solution for uninsured deposits

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Internal Use Only

Include pledged but unencumbered securities as a source of on balance sheet liquidity . . .

 Bank Investment Policies often center on holding investments as a secondary source of liquidity.  With the unrealized loss position in investment portfolios, reputation risk associated with a loss trade, and the proliferation of the Bank Term Funding Program, selling securities for liquidity purposes has moved down the liquidity waterfall.  The most logical liquidity strategy with the investment portfolio is to maximize borrowing capacity by pledging eligible unencumbered securities to the Bank Term Funding Program, and if ineligible the Discount Window or FHLB, to increase secured contingent liquidity capacity.  The second step in this process is to continually monitor and report on pledged but unencumbered securities as a source of on balance sheet liquidity.  This strategy maximizes investment portfolio liquidity by increasing secured borrowing capacity while also maintaining adequate on balance sheet liquidity by holding unencumbered securities during normal operating periods.  Depending on a Bank’s Contingency Funding Plan, it could either borrow against the securities (encumber them) or sell them to stave off a liquidity stress.

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