The Federal Deposit Insurance Corp., which insures $4.8 trillion in bank deposits, reported today that its insurance fund was down to $10.4 billion at the end of June.
This news generated some worried-sounding headlines. Think about it for a moment, though: If the resources available to insure $4.8 trillion in deposits (it's actually more than that, but the FDIC doesn't say how much more for reasons I will explain near the end of this post) really amounted to only $10.4 billion, we shouldn't be worried. We should be completely freaking out"”pulling our money out of banks and stuffing it in mattresses. I haven't noticed this happening lately. So either (a) we are a nation in complete denial, or (b) the size of the FDIC insurance fund doesn't matter much.
I'm going to go with (b). Yes, the continuing shrinkage of the deposit insurance fund from a peak of $52.8 billion at the end of March 2008 indicates that banks are troubled. (Who knew?) But the deposit insurance numbers that really matter are how much the FDIC can borrow from the Treasury to cover any shortfalls and how much it can charge still-solvent banks to pay back any borrowings and eventually rebuild its insurance fund.
First, the FDIC's borrowing line with Treasury: In May, Congress voted to increase it to $100 billion from $30 billion, with borrowings of up to $500 billion possible if the Federal Reserve Board and the Treasury Secretary give their okay. So we're talking about $510.4 billion currently available to insure depositors. What's more, Congress has stated in the past that FDIC-insured deposits are "backed by the full faith and credit of the United States." If losses passed $510.4 billion, Congress would presumably be good for them. If it welshed, that would amount to a default on the nation's obligations.
Taxpayers aren't supposed to end up footing the cost of bank failures, though. Banks are, through the assessments (insurance premiums, basically) levied by the FDIC. The cost of these assessments tends to get passed on to depositors (in the form of lower interest rates on insured deposits), and those depositors are for the most part taxpayers, but let's not get too fancy here. In the second quarter, FDIC assessments brought in $9.1 billion. Loss provisions for bank failures rose $11.6 billion in the quarter. That discrepancy explains why the insurance fund shrank (there were other income sources and costs, but they just about canceled each other out).
Over 10 years, $9.1 billion in assessment income per quarter would bring in $364 billion"”enough to cover far more bank failures than we've seen so far. And assessments are headed higher: The legislation last fall that temporarily increased the insured-deposit limit from $100,000 to $250,000 instructed the FDIC to ignore the increase in setting assessments through the end of the second quarter of this year (so as not to overburden troubled banks). That's why insured deposits are actually significantly more than the current FDIC tally of $4.8 trillion"”because that tally ignores deposits between $100,000 and $250,000. This will be fixed in the FDIC's next quarterly report.
So here's the summary: If you believe in the full faith and credit of the U.S. government and the future profitability of the U.S. banking industry, you really don't need to worry about the size of the FDIC's insurance fund. And if you don't believe in the full faith and credit of the U.S. government and the future profitability of the U.S. banking industry, then you've got far bigger worries than $10.4 billion at the FDIC.
The size of the FDIC's insurance fund does matter politically. If FDIC chairman Sheila Bair has to borrow money from Treasury, her enviable freedom of movement (born of the fact that the FDIC doesn't need appropriations from Congress to pay its bills) will be sharply restricted. Members of Congress will start being much tougher on her at hearings; Treasury Secretary Tim Geithner will become more master than peer. So Bair would certainly like to avoid exhausting that $10.4 billion. But that's her concern, not yours.
There is no full faith and credit of the US backing the FDIC. See below excerpt from FDIC counsel on this matter, available at http://www.fdic.gov/regulations/laws/rules/4000-2660.html.
"Your October 7, 1987 letter asks whether the full faith and credit of the United States Government stands behind the Federal Deposit Insurance Corporation and its deposit insurance fund.... I stated that a joint resolution of Congress (H.R. Con. Res. 290) adopted in March 1982...because of its status as a non-binding resolution, did not serve to create any legal liability on the part of the United States Government to support the funds. You now ask whether Congress has passed a statute that makes the United States Government legally liable for any and all obligations of the FDIC. *** [I]t is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to support the FDIC's deposit insurance fund should the need arise."
Congress PROBABLY will back the FDIC, but legally it is not required to do so, nor are the courts legally required to support any depositor's claim against the FDIC for funds, if insurance funds are not available.
Additionally, there is payee (creditor) risk. The FDIC states, "In a payoff, however, any outstanding transactions or checks presented after the bank has closed cannot be paid or charged against the account."
Any merchant who does business with a customer who is using a debit card or check and the bank fails before the item clears, will not be paid and will have to seek out the customer for payment.
The term 'welshed' is a pejorative racial term referring to the Welsh people (natives of Wales). Much like the term 'gypped', which refers to the Romani people (commonly known as Gypsies), its unpalatable racist etymology tends to fall under our Americentric radar. Now that the issue has been identified, however, we look forward to your prompt revision of the offending term.
Depositors at failed banks need to be aware there are specific time limits within which an insured deposit or safe deposit box must be claimed, after which the funds or property are forfeited.
Further, due to the large number of mergers and acquisitions in the banking industry over the years, it is possible you - either as owner or heir of a deceased family member - might well be entitled to an account or safe deposit box at a bank that has failed, and not even know it.
More than 1,400 banks and 700 savings institutions closed in the aftermath of the Savings and Loan crisis of the 1980s. The current credit crunch has put nearly 100 banks into FDIC receivership in just the last two years, including the largest ever - Washington Mutual (WaMu) - with many more certain to follow.
An explanation of the rules for claiming insured deposits at banks that have closed, and a list of failed banks and those that they have acquired over the years is available at: http://www.failedbankreporter.com
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