Should FDIC Insurance Limits Be Changed?
POSTED ON BY Ken Tumin
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:
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.
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.
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?
http://www.fatwallet.com/forums/finance/588518/ (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.
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.
Also, FDIC could offer additonal insurance to depositors at cost to them.
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?
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.
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.
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.
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.
This action would benefit both consumers and the USA economy.
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.
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.