The Federal Deposit Insurance Corp. is considering offering different deposit insurance limits across various account types following the recent bank failures that resulted in enormous costs to the FDIC.

In a report from the agency released May 1, the FDIC outlined various methods for reforming the current deposit insurance system in which individuals' deposits are insured up to $250,000. The FDIC said a "targeted" approach in which it provides more coverage for business accounts than would be available for consumer accounts is the best option, compared to keeping a limited coverage approach or extending unlimited coverage to all depositors.

However, such a change would require action by Congress and would force banks to pay higher assessments, FDIC officials said during a media briefing.

Benefits of 'targeted coverage'

An approach in which business accounts have higher coverage than consumer accounts has "the greatest potential for meeting the fundamental objectives of deposit insurance relative to its cost," Chairman Martin Gruenberg said in a statement. "Business payment accounts post greater financial stability concerns than other accounts."

Such an approach could help to contain contagion risk in the event of a bank failure since "losses on business payment accounts are most likely to spill over to payroll and other businesses," the report read.

Such "targeted coverage" could extend unlimited coverage to some accounts while others have limits, or could impose varying limits on different account types, according to the report.

Such an approach could potentially require that these large uninsured depositors be collateralized and could involve a rule that more than a certain percentage of a very large account could not be withdrawn in a specific time frame, FDIC officials said during the briefing.

This option could be beneficial for businesses because it is difficult for them to maintain payment accounts across multiple banks to obtain increased deposit insurance coverage, the FDIC said in the report.

Challenges for 'targeted coverage'

At the same time, targeted coverage could have big challenges, such as determining accounts that merit higher coverage from those that do not, and limiting the ability of depositors and banks to circumvent those distinctions.

Also, providing more coverage to businesses than to consumers could result in "a significant increase in assessments," the agency said in the report.

Officials at the briefing said all three options would require action by Congress. There has already been significant controversy on Capitol Hill about whether to raise the $250,000 deposit insurance limit per account.

FDIC officials said two areas within the agency's ability to make changes without action by lawmakers include deposit pricing and fund management.

Debate about the future of deposit insurance limits heated up in the wake of the failures of Silicon Valley Bank and Signature Bank, both of which had large amounts of uninsured deposits.

Following the failure of Silicon Valley Bank, where uninsured deposits made up 93.8% of its deposit base, and Signature Bank, which had 89.3% of its deposit base uninsured, regulators used the "systemic risk" exception to cover all deposits, both insured and uninsured, of both institutions.