The FDIC was created in 1933 with the passing of the Ban

Lastly, many economics and the FDIC believe that deposit coverage is lagging behind inflation. Deposit ceilings have risen in the past but the last adjustment was back in 1980. Some economists believe its time to raise the ceiling to adjust for inflation. Currently, there is no policy in place to index coverage to inflation. The FDIC believes that deposit insurance should be indexed to inflation to maintain its real value.

Originally, deposit insurance was financed though a flat-rate premium. This premium structure meant that all banks paid the same premium for FDIC coverage regardless of the risk it brought to the fund. Theoretically, this type of structure would give rise to moral hazard increasing the chance of bank failures. Since weak banks pay the same premium as healthy banks the have more incentive to make risky investments to increase profit. This was not really a problem though until the 1980?s. Before the Depository Institution?s Deregulation and Monetary Control Act of 1980, banks were heavily regulated in the activities they could engage in. For example, Regulation Q put interest-rate ceilings on many deposits and banks also had portfolio restrictions prohibiting them from holding securities. These regulations reduced banking risk enough to counteract the moral hazard problem but after the DIDMCA was passed bank managers were allowed to engage in more risky activities and had incentive to do so. It was not until this point that moral hazard became a problem leading to bank failures under the FDIC?s flat rate structure.

Overall, the benefits from deposit insurance far outweigh the costs and inefficiencies in the system. The FDIC has served the country well and has provided public confidence for the past 68 years in the banking system. Deposit insurance has been reformed many times in the past when needed to meet the changing demands of banks and depositors. As the banking industry evolves and changes, the FDIC should continually reform deposit insurance to maintain efficiency and the regulatory dialect. It is highly likely that the FDIC?s reform proposals will be adopted as soon as the current flaws become more widely recognized. As long as deposit insurance keeps changing as the banking industry evolves, it?s highly probable that the FDIC will continue to keep the banking industry safe and sound even in times of economic crisis.

king Act, 1933 in an effort to reduce bank runs brought about by the great depression and restore public confidence in the financial system to get the economy back on its feet. The

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