Dedicated to Deposits: Deals, Data, and Discussion

FDIC News and Status of Making the $250K Coverage Limit Permanent

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There has been a lot of news this week concerning the FDIC's proposals to shore up its deposit insurance fund. The worsening economic conditions are increasing the chance of large numbers of bank failures, and the FDIC is trying to prepare for this. The initial plan to pay for this was going to be increased fees along with an emergency fee on banks. But the size of these fees created an uproar with the banks, and now there are talks of lowering these fees if Congress expands the FDIC's borrowing authority with the Treasury Department from $30 billion to $100 billion.

I thought this would be a good time to review the latest news on the FDIC with a focus on depositors. One change of particular interest to many depositors with large savings is the change to the insurance limit. The basic deposit insurance limit is temporarily $250,000, but this is scheduled to go back to $100,000 at the end of this year. What are the chances this will be made permanent? I just did a search of the government's websites on this issue.

Status of the House Bill to Permanently Raise FDIC & NCUA Coverage to $250,000

The insurance limit change started in late September and early October 2008 after the first bailout bill failed to pass the House. A new version of the bill was written, and it included a temporary increase to the basic FDIC and NCUA deposit insurance from $100,000 to $250,000. This revised bailout bill passed Congress and was signed by President Bush on October 3, 2008. The deposit increase is only temporary, and is scheduled to end on December 31, 2009.

In early January 2009, the House Financial Services Committee Chairman Barney Frank introduced H.R. 384, legislation to amend the TARP provisions of the Emergency Economic Stabilization Act (the $700 billion bailout). Title VII of this bill was a provision to make permanent the $250,000 deposit insurance coverage. The last major action on this bill was on January 22 when it was referred to the Senate where it was referred to the Committee on Finance.

It appears a new bill was introduced on February 2nd which only covers the deposit insurance increase. It's H.R. 786, and it's titled "To make permanent the temporary increase in deposit insurance coverage, and for other purposes." The last action was on February 23rd when it was placed on the Union Calendar.

The Congressional Budget Office issued a cost estimate (pdf) of this bill on February 23rd. Here's a summary of CBO's cost estimates:
CBO estimates that enacting this legislation would increase deficits by $14.0 billion over the five-year period from 2009 through 2013, but would reduce deficits by $14.3 billion over the 2009-2018 period. (In total, CBO estimates that the legislation would reduce deficits by $14.9 billion through 2019.) Implementing H.R. 786 would not affect revenues or spending subject to appropriation.

H.R. 786 contains no intergovernmental mandates as defined in the Unfunded Mandates Reform Act (UMRA) and would not affect the budgets of state, local, or tribal governments.

H.R. 786 contains private-sector mandates, as defined in UMRA, on depository institutions and certain bank holding companies. The bill would impose a mandate by requiring certain depository institutions to pay higher insurance premiums as a result of the permanent increase in deposit insurance coverage. In addition, the bill would authorize the FDIC to make assessments on holding companies for depository institutions when necessary to replenish the insurance fund. CBO expects that the direct cost of the mandates would well exceed the annual threshold established in UMRA for privatesector mandates ($139 million in 2009, adjusted annually for inflation).

In short, the CBO estimates the change will cost the banks in higher premiums, but it should not cost the taxpayers in the long run.

Update: In my opinion the $100K limit was long overdue for a permanent increase, so I'm happy to see this proposal and I hope it passes. The US House has a Write Your Representative Service if you want to encourage your representative to support it.

Other Ways to Increase Your Deposit Insurance

For savers with large balances, the details of paying for higher insurance coverage is less of a concern than the question of whether the $250K increase will be made permanent. Even though you can extend insurance coverage way above $100K through revocable trust accounts, it's not as straightforward as staying under the basic limit. There's always the worry that a FDIC claims agent will find something wrong with how the revocable trusts are done which would reduce the coverage. When you're under the basic limit (currently $250K), there's much less doubt. To review some of these issues, refer to my post on extending FDIC/NCUA coverage..

Solvency of the FDIC?

Even if the $250K limit is made permanent, there will still be the worry about the solvency of the FDIC. But that's something that doesn't worry me. As we've seen in the last several months with all of these bailouts, the government is not going to let this financial crisis spiral out of control. The FDIC and NCUA have long claimed that the deposit insurance fund is backed by the full faith and credit of the United States Government. Breaking this promise would greatly worsen the financial crisis. If the deposit insurance fund runs out of money and the FDIC's line of credit with the Treasury runs out, we would just get another bailout. Of course this would be yet another addition to the debt which will put pressure on inflation. But that's another issue.

To review the latest FDIC and NCUA rules for deposit insurance, please refer to my FDIC and NCUA deposit insurance post.


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Comments
8 Comments.
Comment #1 by Anonymous posted on
Anonymous
Everyone write or E-mail your representative in support of H. R. 786.

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Comment #2 by Anonymous posted on
Anonymous
Thank you, Banking Guy, for your research and great reporting on this subject.
The status of making the higher FDIC limit permanent has been of great interest to me. I am hoping it really comes about. It sure would simplyfy things for me and I am sure others as well.

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Comment #3 by Banking Guy (anonymous) posted on
Banking Guy
I forgot to include the link to the "Write Your Rep Service" I just updated the post with this info.

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Comment #4 by Anonymous posted on
Anonymous
If the 250K is made permanent it should be paid for by the banks not my tax money. Why should I pay taxes to help insure your CD'S and bank accounts.

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Comment #5 by jwbodnar (anonymous) posted on
jwbodnar
Why should I pay taxes to help insure your CD'S and bank accounts.

You're going to pay for it no matter what! If it doesn't come out of your taxes, it will come in the form of lower interest rates paid on deposit accounts. One way or the other, you foot the bill.

BTW, I hope this bill fails. It also includes the toxic mortgage modification provision that allows bankruptcy court judges to modify home loan terms. That will result in higher mortgage costs as lenders jack up rates and fees in order to cover the losses on loans modified in bankruptcy.

The increased FDIC insurance limit should be handled separately from other legislation, but the House leadership is tying them together in order to cram things that won't pass on their own, like bankruptcy court mortgage modification, down your representatives throats.

Write your representative and ask that they vote against this measure until it is separated from the housing bail out bill.

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Comment #6 by Anonymous posted on
Anonymous
If the $250,000 limit is not made permanent, come Jan. 1, 2010 there will be a run on banks as people pull out their funds over $100,000. (I know I will be doing it.) With this run on some banks, there will be some more bank failures which will deplete the FDIC fund even more.

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Comment #7 by Anonymous posted on
Anonymous
The fact that the higher coverage terminates at the end of this year is already having a major effect on deposits. Would you put over $100K now in a one-year CD that has a six month penalty for early withdrawal?

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Comment #8 by Anonymous posted on
Anonymous
Reading that you are not worried about the solvency of the FDIC makes me feel a lot better banking guy. I have to admit though, I was quite worried a couple of days ago when I read this:

WASHINGTON (AP) -- The head of the Federal Deposit Insurance Corp. has warned that the fund insuring Americans' bank deposits could be wiped out this year without the money the agency is seeking in new fees from U.S. banks and thrifts.

(full article at: http://hosted.ap.org/dynamic/stories/F/FDIC_BANK_FUND_WARNING?SITE=CAVIC&SECTION=HOME&TEMPLATE=DEFAULT)

But then there was this:
Bill Seeks to Let FDIC Borrow up to $500 Billion
from the Wall Street Journal today

http://online.wsj.com/article/SB123630125365247061.html

so i now feel a little better...not a lot...just a little..

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