FDIC Insurance Coverage: Is Your Money Safe?
I’ve written in the past about the importance of banking only with FDIC-insured institutions (or NCUA-insured credit unions), and also of respecting the FDIC insurance limits. That’s all well and good, but…
Is the FDIC running out of money?
If you’ve been following the financial news over the past day or so, you’re likely aware that the FDIC insurance fund is running low. In fact, the FDIC has seized 94 failing banks during 2009, driving the insurance fund to its lowest level since the peak of the Savings & Loan scandal in 1992.
Here’s the scary thing… The FDIC currently insures roughly $4.8 trillion in deposits, but they only have about $10 billion on hand (down from roughly $30 billion at the beginning of the year). In other words, the fund could easily be wiped out by the failure of just one major bank.
Covering the shortfall
The FDIC is funded by premiums from member banks, but these premiums haven’t been able to keep up with the FDIC’s recent “burn rate.” The FDIC is thus considering at least four different options for shoring up the insurance fund.
- Borrowing from healthy banks.
- Levying a special fee on banks.
- Borrowing from the Treasury.
- Collecting regular premiums early.
Unfortunately, none of these options are particularly attractive.
Borrowing from healthy banks reduces the amount of money available in the private sector to fund the recovery, whereas borrowing from the Treasury is politically objectionable. At the same time, levying additional fees could be push weak banks toward the edge of failure.
According to an article in the Wall Street Journal, the FDIC is currently leaning toward the final option. Unfortunately, that is a temporary solution, as they’re essentially cannibalizing future premiums.
Are you concerned?
So… Are concerned about the solvency of the FDIC? Personally, I’m not happy about the current situation, but I’m also not losing any sleep over it. I figure that whatever is going to happen will happen, and the Feds will simply bail out the FDIC if they get in over their heads.
Yes, that means the possibility of printing more money to cover the shortfall, but the outcome will be the same whether our money is in the bank or stuffed in our mattress.
Source: AP News Wire and WSJ.com
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Filed under: Banking
About the author: Nickel is the founder and editor-in-chief of this site. He's a thirty-something family man who has been writing about personal finance since 2005, and guess what? He's on Twitter!
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18 Responses to “FDIC Insurance Coverage: Is Your Money Safe?”
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September 23rd, 2009 at 2:16 pm
My level of trust toward U.S. government programs could not get much lower.
The only reason I do not worry is because I put my trust in my higher power… otherwise I may have a very valuable mattress! Well – once I pay off my debt that is.
September 23rd, 2009 at 2:22 pm
Either way there is less money available in the economy, which will slow down any recovery.
I agree about the degree of concern. Unfortunately, as of right now, there are bigger problems. However, a problem like this has a real chance of hurting us if it gets to another level.
September 23rd, 2009 at 2:24 pm
Yikes!
I’m with you. Seems scary, but not enough to cause immediate panic. It helps that I don’t have any real assets, though.
September 23rd, 2009 at 3:09 pm
Here are some other solutions:
Stop insuring Money Market Funds, they are investments and should not be covered by FDIC.
Lower the rate covered back down to $100k.
Only insure per person per bank, not per account. People get around the ‘per account’ restriction by hoarding all their cash in multiple accounts each less than max covered rate. The intent of the insurance wasn’t to insure every damn penny.
Break up these “too big to fail” banks into smaller companies. If we recently lost 90 banks, then split the largest 3 banks back into 90 smaller banks.
Regulate the banks more — if the FDIC is insuring the banks, then the FDIC should regulate the banks harder to keep them from losing so much money.
September 23rd, 2009 at 3:12 pm
Generally when a bank fails the FDIC doesn’t have to step in and pay anywhere near the full value of all the money on deposit. The bank has assets that will cover much of their debts. Usually when a bank fails another bank will take over everything. The FDIC just has to pay the shortfall and thats just a % of the total amount. Sometimes the cost to the FDIC is zero and sometimes its more. For example when Wamu failed Chase stepped right in and took it over and there was no cost to the FDIC.
September 23rd, 2009 at 3:48 pm
@Jim: Great point.
September 23rd, 2009 at 4:00 pm
@BG, it already is per person per bank, not per account.
September 23rd, 2009 at 4:11 pm
@Hatch: Correct. The only way around the limit is to change the registration type (e.g., single vs. joint accounts). Details here:
http://www.fivecentnickel.com/.....trategies/
September 23rd, 2009 at 5:46 pm
True, none of the four options are ideal, but then neither is the idea of more banks failing.
Before brainstorming more solutions, I would get more info about the existing ones you mention.
You say “borrowing from healthy banks reduces the amount of money available in the private sector to fund the recovery…” How much is it really reducing banks’ lending power? By 10 percent? A half a percent? Is this amount negligible?
Later you write “at the same time, levying additional fees could be push weak banks toward the edge of failure.” How big are the FDIC fees? Are they really a major factor in failing banks? Or just a contributing factor?
I’m not saying you are wrong, I’d just like a bit more info before writing these options off. Thanks!
September 23rd, 2009 at 10:01 pm
The scary part is that most of those “failed banks” didn’t really fail. Their asset ratio fell below what the FDIC rules allow and so they were seized before they could fail.
I’m all for letting banks actually fail before bailing them out.
September 23rd, 2009 at 10:04 pm
FDIC is insured by the US government, which has never defaulted on its financial promise. I think there would be bigger problems to worry about in the hypothetical world in which there is no reliable US government beside your bank account.
September 24th, 2009 at 2:43 am
Frankly, I see this as a non-issue going forward. No matter the cost, the FDIC will remain solvent as a corporation so there isn’t much to worry about because we have very durable printing presses. Think about it, if the FDIC tanked, last September would look like a bachelor party at the Playboy mansion compared to what would happen with an FDIC failure.
With that said, if you’re really concerned, you can always park some money in T-bills, TIPS, I Bonds, or even good old fashioned EE Bonds. These are all direct obligations of the government and you can skip the uncertainty of FDIC protection. Of course, these instruments present their own issues from zero yields to interest rate risk to early redemption penalties.
I’m with you, Nickel…not happy, but not losing sleep over it.
September 24th, 2009 at 12:22 pm
This is a good topic, but not one worth worrying about. People talk about the FDIC or Social Security running out of money as if they’re private enterprises with a very real risk of bankruptcy. That isn’t even close to the truth.
They’re government agencies who have access to the full resources of the state. I wouldn’t lose sleep over this, not even a little.
As citizens we need to be concerned with big picture issues like taxes and spending. But these “Agency X is going broke/facing bankruptcy” are component issues and mostly scare tactics by political interests and the media.
I’ll concede however that the fear mongering does accomplish it’s mission of getting peoples attention.
September 24th, 2009 at 1:05 pm
Or they could do what every other insurance company does in this position:
- Buy reinsurance from a reinsurance company (a company who insures other comapnies’ insurance funds).
Of course they won’t do that, because (as Kevin mentioned) they are a federal agency and aren’t bound by any real financial rules and they have magical immunity to failure.
However, that *should* worry Kevin, because the way the government fixes these things is to devalue the dollars we hold by printing more.
That said, I agree this is all very unlikely, the whole point of an insurance fund is that it grows in good times and shrinks in bad times.
September 27th, 2009 at 2:46 pm
Just printing more money is not the answer that only devalues the dollar. The FDIC needs to require the banks to pay an extra premium now and that raise all future premiums so that the fund stays stable. Under no circumstance should the FDIC borrow money the banks got us in this situation they can pay to get us out.
September 27th, 2009 at 9:30 pm
Trav (14)–That fix that you write of is the big picture issue we should all be concerned with, but it seems to be lost on most people. We get wrapped up in these details and ignore the real story.
January 26th, 2010 at 7:47 pm
Who ever got the idea that printing more money ONLY devalues the dollar? The dollar, my friend, is valueless right now and has been for some number of years. It states right on the note that it is Federal
Reservve Note and will be replaced or paid in kind with currency of the USA!
January 26th, 2010 at 8:14 pm
@Stymie – It also says ‘This Note is Legal Tender for All Debts, Public and Private’ and unlike gold or coinage, it is the only legal tender in the United States.
For the history buffs out there, the U.S. was the first government to move to paper currency en masse and this was instrumental in our growth as a nation.
@Liz – a couple of quick points. The government has increased the money supply in response to the recession and this doesn’t really mean “printing more money” in the literal sense. What that really refers to is increasing M2 money supply which is primarily done through reducing short term lending rates from the Federal Reserve. Just as quickly as the money supply was increased, so too can the money supply be contracted (hopefully after we’re truly on firm footing economically).
As to letting the FDIC borrow money, should the FDIC not be able to continue operations, the loss of confidence from consumers would far outweigh any costs of borrowing. What’s been an interesting development is Obama’s ‘Financial Responsibility Tax’ on banks with over $50 billion in assets. It sounds great to levy taxes on these banks, but consumers ultimately pay the price. To truly get at the people responsible, it would be a far smarter endeavor to levy a tax on the individuals rather than the corporation that employed them.