In the Great Depression of the 1930’s many people lost their life savings when their banks failed and closed. To prevent that from ever happening again Congress enacted the Federal Deposit Insurance Corporation (FDIC) to insure deposits in federally chartered banks and other institutions. The promise was that depositors of up to a certain dollar limit would be protected by the “full faith and credit of the United States Government” no matter what.
Since then wise savers have been able to have confidence that their savings were safe. With the current rash of bank failures, we have seen a few investors who exceeded the FDIC guaranteed limit incur losses when their bank or savings and loan failed, but those who heeded the insured limit have been kept whole. The FDIC has protected those savers as institutions like Washington Mutual, Wachovia, Downey Savings, Pomona First Federal Savings and numerous others failed.
One thing we have learned from the current economic crisis is that there are early warning signs of bad things to come. It is just that most of us don’t seem to notice them or we dismiss them as just a blip. Now, we may be getting an early warning sign about FDIC insurance itself.
News media began to report in the last few days that the FDIC is looking for ways to prop up its insurance fund. The fund has been hit hard by 95 bank failures this year, as well as numerous failures last year. And, more failures are predicted going forward.
The main source of FDIC funding is a fee, some might call it a tax, levied on insured banks and institutions. According to a story in the business pages of the Register on September 29, the FDIC may require its member banks and institutions to prepay their fees for the 2010-2011year. This would prop up the FDIC fund by accelerating its revenue.
At least it would prop up the fund for a while. Think of it as borrowing from the future in order to get through tough times. Of course, no one knows how long these tough times will last, or whether they will get worse. In the long run it is just possible the FDIC Insured decal on the door of your bank may go the way of the names of banks like WaMu, Downey, etc. Let’s hope not.
When Uncle Sam increased the 100,000 limit to 250,000 as a temp measure and has extend this measure, The past fee’s were/are not enough to cover the current guaranty.
Uncle Sam? I thought Bush had something to do with the increase, they were worried about a run on the banks.
They did not have enough money in the fund to cover it at $100,000 let alone at the greater amount.
It may come down to two choices, print more money or not pay the depositors at some point. Not good options.
I know people who did not get paid in full on their regular passbook deposits when their banks failed, and these are NOT rich people either.
What if the bank failed that dealt with your employers payroll? Not only would your employer be bankrupt but the payroll checks would be worthless too.
You betcha there was a scare of a “run on deposits” and the current administration has extended the increase to 250,000 again.