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INTRODUCTION
The dollars in our wallets are maintained by the Federal Reserve, and as the sign on the door to every Federal Deposit Insurance Corporation (FDIC) insured depository institution (IDI) reminds us, our 'deposits are backed by the full faith and credit of the United States government'. 1 For most purposes, currency in circulation is a perfect substitute for funds deposited in an IDI to the extent that both serve as the final means of settlement for debt obligations. How perfect a deposit substitutes for currency depends on the solvency of the IDI. The FDIC safeguards the nation's depositors by pledging to pay out all insured deposits in the event that the private depository is met with illiquidity or insolvency.
Depository institutions pay premiums into a deposit insurance fund that is used by FDIC to pay for any losses caused by an insolvent bank. Most of these losses are the insured deposits held by a failed bank, as well as any administrative costs of liquidating its assets to settle its liabilities. As a result, defining which deposits qualify for insurance is of prime importance for the FDIC's operations and fiscal health.
One contentious category of deposit covered by the FDIC is the brokered deposit. In 1984,2 the FDIC moved to eliminate 'pass-through' insurance coverage for brokered deposits, that is, insurance coverage on qualified fiduciary or custodial accounts. This rule was later thrown out by the United States Court of Appeals for the District of Columbia Circuit 3 as it did not comply with the statutory deposit insurance mandate, and has since been debated (pp. 175, 291, 435 and passim ).4 Despite the nature of these deposits, insurance coverage of brokered deposits by the FDIC persists. As a compromise, in 1989 Congress passed the Financial Institutions Reform, Recovery and Enforcement Act,5 in part to prohibit IDIs that failed to meet capital requirements from accepting brokered deposits (p. 412).6 Today the FDIC insures both those deposits held by the banking system deemed to be 'core' and also those that are brokered (provided that appropriate capital levels are maintained).7
Section 1506 of the Dodd-Frank Act8 of 2010 required that a study be commissioned on core deposits and brokered accounts. For the...