Should FDIC Insurance Limits Be Changed?


A banking consultant interviewed in this LA Times article makes the case that the FDIC should insure all bank deposits without limit. He contends that depositors shouldn't be expected to know if a bank is in serious trouble, and he thinks the current limits just increase the chance of bank runs that lead to bigger losses for the FDIC.

There has been times when the FDIC did cover all uninsured deposits in a bank failure. The most recent example was last month when First National Bank of Nevada and First Heritage Bank failed (see press release). Another example of this for a much larger failure was mentioned in the article. This happened in 1991 when Bank of New England with $22 billion in assets failed. For this case, it appears the FDIC chose to cover all uninsured deposits to reduce the chance of a large scale crisis. But this was costly for the FDIC, and as the article describes "Congress passed a law that decreed the FDIC had to resolve every bank failure in the least costly manner to the agency's insurance fund -- which, for the most part, meant holding to insurance limits, regardless of the broader implications for the banking system."

The article also mentioned examples from Great Britain and Japan in which the governments threw out deposit limits to reduce the impact to the financial system.

Eliminating the insurance limit or at least raising it would be nice for depositors with large savings, but there is the issue of moral hazards which can be costly for society. This post at Mish's Global Economic blog makes the case that the current FDIC limits are too generous. There's a recommendation to eliminate FDIC insurance for all but checking accounts.

Note, the $100K FDIC insurance limit may increase starting in 2011. The same law that was passed in 2006 that increased limits on IRAs to $250,000 also sets a process that would raise limits based on inflation. Here's an excerpt from the 2006 press release:
The new law also established a method by which the FDIC would consider an increase in the insurance limits on all deposit accounts (including retirement accounts) in the future, but only every five years starting in 2011. Any such increase would be based, in part, on inflation.

Note, it says the FDIC will consider an increase. Hopefully, there will be some top officials in the FDIC at that time who'll be sympathetic to savers and won't be too worried about moral hazards.

For the current rules on FDIC insurance, please refer to this post, and for ways to extend FDIC insurance above $100K, please refer to this post.

Thanks to the reader who mentioned this news story in the finding the best deals post.

  |     |   Comment #1
The limits do need to be moved up as time and inflation has increased.
People who want to be safe must open like a dozen bank accounts to just stay under the FDIC limits.

I also always wondered how mega rich people handle these limits? Do they put it most in high safe banks in different places?
  |     |   Comment #2
Treasury bills/notes/bonds are "secure" with no upper limit. At the moment, their rates are horrible compared to online savings accounts and CDs, but a little while ago you could easily get a nice 3-month T-bill for over 5%. An added bonus is that there's no state income tax on the interest from T-bills. You can read all about them here: (first posts are summary)

However, I'd wait until the rates (roughly tied to the Fed Funds rate) are decent again before going back to treasuries.
  |     |   Comment #3
The FDIC insurance limits should be eliminated or at least raised much higher than the current limits.

Sure U.S.Treasuries have no limits, but the puny returns make them very unattractive, especially for retirees like myself.

I would say that it has been more than just a little while ago when a 3-month T Bill returned 5% or better. Heck, I would jump on 10-year Treasuries if they ever reached 6-7% range.
  |     |   Comment #4
The limits should be reviewed and revised periodically, say every 4 to 5 years, to keep up with the increase in total deposits with the banks.

Also, FDIC could offer additonal insurance to depositors at cost to them.
  |     |   Comment #5
I have not read in detail the FDIC regulations. But my theory is that the FDIC should charge a higher persentage rate of a bank's assets if the bank happens to be a mega bank.

That might be the case, I don't know. In addition, another idea would be for them to come up with some form of CDs for the regular investor: Viz, generating secure capital. Anyone know's if they do anything like that?
  |     |   Comment #6
I think like any universal insurance there should be a limit and 100k is just about right.
Even SS has a limit.
Those who are rich can buy their own insurance, Most brokers have additional insurance thru SIPC which is much larger.
  |     |   Comment #7
Under no circumstances should the limit be raised. If the fat cats are too lazy to spread their money around in order to stay under the limit then let them lose it. I would think there is enough banks out there to handle most peoples money at a $100000 a pop. Bill and Warren might have a problem. I agree with the post that suggested more insurance paid for by the depositor. I bet not many would want more insurance it they have to pay for it. Everybody wants the government to pay for everything. People should take responsibilty for there own lives and money and not keep crying to the gov for more more more all the time.
Triple Jaygh and the Devil
  |     |   Comment #8
If there was no FDIC bank insurance I would not keep my money in a bank. I am guessing that many people would pull their money out if insurance was eliminated. Many banks would go out of business, as most banks don't have enough cash to give out should a majority actually ask for all their cash.

If extra insurance coverage was offered at a reasonable price, I would pay it.

Incidentally, regarding the SIPC: The SIPC provides insurance coverage up to $500,000 of the customer's net equity balance including up to $100,000 in cash.
  |     |   Comment #9
@Triple J,
If banks wants to stay in business they should buy it like other business expenses and tax money should not be used for that.
This will weed out inefficient banks.
Triple Jaygh and the Devil
  |     |   Comment #10
Yes, it would weed out inefficient banks, as you said, but the end result might have a negative effect on our interest rates.

It is often those inefficient banks that pay the higher rates, and it is those higher rates that often makes the larger (or efficient) banks pay a higher a rate to stay competitive.
  |     |   Comment #11
FDIC insurance limits should be INCREASED ASAP.
This action would benefit both consumers and the USA economy.
  |     |   Comment #12
I think normal depositors should be completely covered; but that big corporations, foreign governments should not be covered at all.
  |     |   Comment #13
Nothing is free. More insurance should require higher premiums which may result in lower interest rates for savers. But why is it so hard for people to spread their money around a little? This is a problem which I would like to have!
Government is doing less and less for people with no money at all, and yet some people with lots of money in the bank want more help? It shows a real detachment from the everyday reality of working people.
Mr. Math
  |     |   Comment #14
salemfivedirect has insurance up to 1 million dollars.
  |     |   Comment #15
The FDIC insurance should have not limits for personal and IRA accounts.

The Feds bail out the private Wall Street bankers without hesitation. Why shouldn't they come to the rescure to insure all the hard earned savings of the working class?

To raise the limits adjusted to inflation is a joke. We all know the Feds skew the way they measure inflation to hide how high the inflation factor really is.
  |     |   Comment #16
Considering the banking industry's current state of deregulation, especially the so-called shadow banking system, I believe FDIC insurance creates a very real moral hazard. If FDIC insurance limits are to be raised (and they may well need to be), then there must be a concomitant return to a strong regulatory structures that ensure sound banking practices. Lacking that, unbridled greed will prevail and ultimately the whole system will fall like a house of cards.
  |     |   Comment #17
Obviously the $100,000 limit should be raised, but statistics show that there are actually VERY FEW Americans with more than $100K in savings. With the national negative savings rate, I am sure the FDIC thinks it has it covered.
How Safe is the FDIC? Article Reviews the Issue
With Indymac's failure costing the FDIC $4 to $8 billion of its $53 billion insurance fund, there are some concerns about the soundness of the FDIC. But according to this CNN article:

However, there are many unknowns. As a former FDIC chairman mentioned, it's very hard to know what banks will fail next. We were able to tell that Indymac wasn't on the FDIC's secret list of problem banks since the FDIC had reported the total assets of these problem banks as only $26 billion. Indymac had $32 billion in assets.


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