Deposit Insurance, Regulatory Reform, and What It Means for Community Banks

Although depositors of Silicon Valley Bank and Signature Bank were ultimately protected, due to the extraordinary circumstances that prompted regulatory intervention, not all depositors received the same level of protection. The decision to insure some depositors and not extend the same protection to others was driven by the systemic risk a given individual bank posed to the broader financial system. As a result, customers with uninsured deposits at smaller firms that failed later that year saw their payroll accounts frozen, leaving many small businesses unable to pay employees, shaking public confidence in the banking system.

Those events prompted bipartisan efforts to modernize deposit insurance, with a focus on expanding coverage and improving access for smaller banks. Lawmakers across party lines now describe targeted coverage for business and payroll accounts as a way to strengthen community institutions and protect the local economies they support. The discussion has shifted from whether to expand coverage to determining the appropriate level of protection and allocating the associated costs. This, combined with a review of partner banking models and a potential increase in caps for favorable treatment of reciprocal deposits, has introduced a series of changes that could reshape the deposit landscape for community banks.

Main Street Depositor Protection Act (S. 2999)

Senators Angela Alsobrooks of Maryland and Bill Hagerty of Tennessee introduced the Main Street Depositor Protection Act (S. 2999) to provide higher FDIC coverage for non-interest-bearing transaction accounts. The proposal would raise insurance limits to as much as $10 million for non-interest-bearing transaction accounts at banks with assets under $250 billion.

The bill reflects a lingering concern stemming from the banking crisis of 2023, which, despite the availability of market-based solutions, has led to standard coverage no longer adequately serving the liquidity needs of businesses and municipalities that move large sums of money daily. The FDIC’s 2023 report, Options for Deposit Insurance Reform, identified targeted coverage for business payment accounts as the most effective way to strengthen depositor confidence while managing cost.

Supporters view S. 2999 as a pragmatic bridge between the systemic-risk protections used in 2023 and a long-term modernization of the insurance framework. Treasury Secretary Scott Bessent echoed that view in 2025, stating, “We will work with Congress to consider reforms to deposit insurance, including potentially higher limits for business payment accounts.”

Detractors of the bill cite as their primary objections the availability of market-based deposit networks, a likely increase in deposit insurance fund premiums, and the lack of clarity about who will pay and how much. Combined with increased operational complexity and the potential increase in model hazard, their position is that the proposal does not pass the required cost-benefit analysis.

Community Bank Deposit Access Act (H.R. 5317)

While much of the deposit insurance reform debate has centered on how high coverage should go, the Community Bank Deposit Access Act (H.R. 5317) focuses on the regulatory treatment of deposits. Introduced in July 2025 and advanced through the House Financial Services Committee by a 48 to 2 vote, the bill updates the classification of certain custodial deposits in Section 29 of the Federal Deposit Insurance Act.

Under new subsection (j), H.R. 5317 would exempt some custodial deposits at well-capitalized institutions from being labeled brokered, provided the bank has less than $10 billion in assets, maintains a good or outstanding exam rating, and limits custodial balances to no more than 20 percent of total liabilities. Institutions exceeding those caps could apply for a waiver.

This distinction matters. Many community banks rely on fiduciary or custodial relationships with trust companies, plan administrators, and similar intermediaries to serve clients with large insured balances. Classifying these deposits as brokered has long increased assessment costs and limited their use, reducing access to attractive sources of deposits. The new framework recognizes that custodial relationships are often stable, relationship-based funding sources, rather than more rate-sensitive brokered funds.

Industry groups have broadly supported the measure. The Independent Community Bankers of America (ICBA) endorsed the bill in September of 2025, saying it “will help community banks maintain lower funding costs, expand lending opportunities, and serve their communities by attracting stable, low-cost funding.” The American Fintech Council said that the Act would “codify a thoughtful and evidence-based update to the treatment of custodial deposits” and clarify that custodial deposits in bank-fintech partnerships are distinct from brokered deposits.

Together, H.R. 5317 and S. 2999 signal a broader effort to reduce systemic risk by updating the FDIC deposit insurance policy, mitigating the impact of future bank failures, and increasing regulatory flexibility to enable a more digital-first, diversified banking system that balances access, stability, and competitive fairness.

Keeping Deposits Local Act (H.R. 3234)

The Keeping Deposits Local Act (H.R. 3234) would modernize how existing FDIC rules treat reciprocal deposits. The bill seeks to change the current exemption limit for classification as brokered from the lesser of 20% of liabilities or $5 billion to a new tiered framework that adjusts based on institution size. Under the proposed rule, banks with less than $1 billion in liabilities could exclude up to 50% of reciprocal deposits from classification as brokered; those between $1 billion and $10 billion could exclude up to 40%; and institutions between $10 billion and $250 billion could exclude up to 30%.

Reciprocal deposits allow banks to exchange large customer balances so each depositor can access expanded deposit coverage, up to a program insurance limit, while maintaining a single relationship with the originating institution. By allowing banks to classify a larger share of reciprocal deposits as non-brokered funding, H.R. 3234 would help community and midsize banks retain municipal, corporate, and institutional accounts that often migrate to the largest banks when total customer balances exceed the regulatory caps.

“Reciprocal deposits are one tool to help secure greater insured deposits,” the ICBA wrote in a letter ahead of the Sept. 16, 2025, markup of H.R. 3234. “Raising the percentage of reciprocal deposits allowed would assist banks approaching the current-law threshold and support lending needs.”

For R&T’s network banks, trust companies, wealth managers, and FinTech platforms, these developments point toward broader adoption of insured deposit solutions as a complement to a range of deposit funding, placement, and liquidity tools. As the regulatory framework evolves, institutions positioned to operationalize these reforms through efficient, scalable, and transparent platforms will be best equipped to capture new deposit opportunities and reinforce depositor trust.

Momentum around deposit insurance reform continues to build, but the path forward remains uncertain. Lawmakers generally agree that the current system lacks protection for regional and community banks. Yet, they differ on how far to extend coverage and how to balance stability, cost, and competition.