Broker Check

FDIC-Is Your Money Really Safe?

The Federal Deposit Insurance Corporation, or FDIC for short, is an independent agency created by Congress in 1933 to maintain stability and public confidence in the nation's financial system by insuring deposits for at least $250.000 and examining and supervising financial institutions for safety, soundness and consumer protection. The FDIC is a corporation that answers to and is deemed to be a part of the federal government; however, the FDIC does not receive Congressional appropriations. It is funded by premiums and assessments that banks pay for deposit insurance coverage and from earnings on US Treasury securities investments. The FDIC insures more than $7 trillion of deposits in US banks and thrift institutions through the Deposit Insurance Fund (DIF). The Board of Directors of the FDIC is the governing body of the FDIC. The Board is composed of five members, all of whom are appointed by the President of the United States and confirmed by the Senate, with no more than three being from the same political party (www.fdic.gov).

The collapse of the housing market, the increase in mortgage delinquencies and home foreclosures, and the credit crisis have all led to a dramatic increase in bank failures over the past few years. To protect insured depositors, the FDIC responds immediately when a bank or thrift institution fails. When banks fail, the FDIC is appointed as receiver, which in many ways is similar to a bankruptcy trustee. When acting as receiver, the FDIC may liquidate the failed bank, or, more often times than not, the FDIC will transfer some or all of the failed banks assets to an acquiring institution (www.fdic.com). Depositors are protected up to the FDIC insurance limit, currently $250,000. On January 1, 2014, the standard insurance amount of $250,000 is slated to return to $100,000 per depositor. In most bank failure cases, the FDIC arranges for the various bank branches and insured deposits to be transferred to another well capitalized bank, and banking services for the failed bank's customers generally continue uninterrupted (www.fdic.gov).  

In light of apparent systemic risks facing the banking system, the adequacy of the FDIC's financial backing has come under scrutiny. Beyond the funds in the DIF and the power to charge premiums for FDIC insurance, according to the FDIC website, “FDIC deposit insurance is backed by the full faith and credit of the United States government.” This means that the resources and funds of the United States government stand behind FDIC-insured deposits. However, the statutory basis for this claim is less than clear. There appears to be no laws strictly binding the government to make good on any insurance liabilities unmet by the FDIC.

FDIC Bank Failures


Yr


#


Total


Assets of Failed Banks


Loss to FDIC's DIF


07


3


$2.60 bil


$113.00 mil


08


25


373.58 bil


15.71   bil


09


14


170.87 bil


36.43 bil


10


68


62.58 bil


16.15 bil


 


236


$609.63 bil


$68.40 bil


Source:http://online.wsj.com/public/resources/documents/info-Failed_Banks-sort.html

Since the start of the financial crisis in 2007, there have been 236 bank failures with assets totaling $609.6 billion, deposits totaling $425.5 billion, and an estimated loss to the FDIC's DIF of $68.4 billion

As a requirement under the insurance statute, the FDIC is only obligated to keep the ratio of funds held in the DIF to deposits insured between 1.15% and 1.50% (“The Coming…”). As of June 2008, the DIF was down to $45.2 billion, a mere 1.01% of all insured deposits (Paletta and Holzer). In August 2008, the FDIC was under pressure to decide how best to replenish the DIF (WSJ Online), whether through a special assessment charged to FDIC insured institutions or through borrowing from the FDIC's $500 billion line of credit from the United States Treasury. In regards to the latter option, the last time the FDIC borrowed funds from the Treasury was at the tail end of the savings and loan crisis in the early 90's after thousands of banks were closed. The need to borrow money again is cause for concern for Washington regulators regarding the weakness of the US banking system in the wake of the credit crisis. (Paletta and Holzer). In May 2009, the FDIC did utilize one of these options, a special assessment of 5 basis points, or .05 percent, on FDIC insured institutions to help rebuild the DIF (www.fdic.gov).

Jumping ahead to June 2009, as a result of the ever-increasing bank failures, the DIF fell even further to $10.4 billion, or approximately ¼ of 1 cent for each dollar insured , even with the additional funds generated through the special assessment (“The Coming…”). At the year-end of 2009, the DIF fell into the negative, hitting a $20.9 billion deficit. FDIC Chairman Sheila Bair stated “The number of bank failures likely will peak this year and will be slightly higher than in 2009.” The FDIC expects the cost of resolving bank failures to grow to about $100 billion over the next four years. The agency mandated at the end of 2009 that FDIC insured institutions must prepay about $45 billion in premiums, for 2010 through 2012, to help replenish the DIF (www.cbsnews.com). In addition to those prepaid premiums, the FDIC must once again replenish the DIF, using either an additional special assessment, borrowing from the Treasury, or possibly even borrowing from the FDIC insured banks that it is responsible for protecting (Labaton). According to the New York Times, senior regulators are seriously considering a plan to have the nations healthy banks lend billions of dollars to rescue the DIF, which would enable the fund to continue to rescue the most troubled banks (Labaton).

Sources:

Federal Insurance Deposit Corporation . N.p., 010032010. Web. 5 May 2010. .

Paletta, Damian, and Jessica Holzer. "FDIC Weighs Tapping Treasury as Funds Run Low." Wall Street Journal 27 August 2008, Print.

"The Coming Deposit Insurance Bailout." Wall Street Journal 01 Sep. 2009, Print.

Labaton, Stephen. "F.D.I.C. May Borrow Funds From Banks." New York Times 09 Sep. 2009, Print.

“Tracking the Nation's Bank Failures”. Wall Street Journal Online.6 May 2010. l