Who’s going to pay for deposit insurance?

By Felix Salmon
June 16, 2010
Tim Fernholz has the details on the new FDIC deposit-insurance cap: it looks like the temporary $250,000 limit is not only going to be made permanent, but will also be made retroactive, to cover uninsured depositors in IndyMac. And then there's this:

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Tim Fernholz has the details on the new FDIC deposit-insurance cap: it looks like the temporary $250,000 limit is not only going to be made permanent, but will also be made retroactive, to cover uninsured depositors in IndyMac. And then there’s this:

The $100,000 cap hadn’t been increased since 1980, and only in 2006 was it indexed to inflation; one compromise in this measure will keep the cap at $250,000 until it would have risen above that level under the inflation index.

I’m not sure what this means, since $100,000 in 1980 dollars is actually slightly more than $250,000 in today’s dollars.

In any case, what we haven’t seen yet is any indication of how the banks are going to reimburse the FDIC for all the money it’s spent to date and will spend in future bailing out depositors. Chances are this process is going to take decades — and giving the banks all that extra time to come up with the money is a substantial back-door bailout in its own right. It’s not like we’re asking them to borrow the money at market rates, give it to the FDIC, and then pay interest to their creditors: the difference between that and what we’re going to end up with constitutes a multi-billion-dollar subsidy from the taxpayer to the banks.

And, of course, if there’s another major crisis in the next couple of decades, the FDIC fund might at this rate never get replenished.

I don’t have a problem with deposit insurance: it helps to ensure a stable banking system, and that’s a good thing. But it doesn’t come free, and I want to see a lot more detail on how it’s going to be paid for. Let’s make sure it’s the banks doing the paying, not the taxpayer.


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It means that if the cap were indexed to inflation in 1980, when would it have grown above $250,000. According to my calculation based on CPI-U, that would have happened at the end of February 2005.

Posted by Stevensaysyes | Report as abusive

It means that the cap was indexed in 2006, so when $100,000 in 2006 dollars would be more than $250,000, it will again begin to increase with inflation.

Posted by mattm | Report as abusive

It’s not the banks (or their customers) that would be paying this that “used” the insurance, though. If an insurance company goes under and claimants are reimbursed, I wouldn’t call that a “bailout” of the customers who never made a claim, on account of you didn’t go after them. It seems awfully fanciful.

Posted by dWj | Report as abusive

In practice, the FDIC cost difference between insuring $100,000 and $250,000 is not significant as depositors have historically used multiple accounts (up to the limit) and/or multiple banks to increase their insurance coverage.

So I would say that you are worried about the right thing but for the wrong reasons.

First, the FDIC guarantee on non-interest bearing deposits does, on the other hand, have significant costs and in this rate environment, many banks are simply asking more and more customers to put money in non-interest bearing demand accounts.

Second, the FDIC fund is about $40B in the red, but directed banks to prepay three years of premium at the end of 2009 to the tune of about $60B. So it has the cash, but it can’t accrue the premiums (to reduce the loss) until the year those premiums are actually due. As the FDIC so proudly notes, they have cash and don’t need to borrow from the Treasury.

BUT, what about the future?

The official problem bank list of about 700+ US banks totals about $400B in assets and the average loss per asset in a typical bank failure ranges from 15% to 35% depending on the loss share agreement. So the FDIC’s future cash position ranges from about zero to say,-$100 million. And the FDIC can borrow that latter amount from the Treasury under current rules.

So you are right to worry about the FDIC and taxpayer bailouts, certainly in terms of interest costs. Even without another crisis, the FDIC may need to borrow sometime down the road. It depends on the average loss size of bank failures (i.e. real estate price levels) and the length of time the FDIC stretches out the clean up process.

And the government’s response?

The FDIC seems to have slowed down bank failure rates in the last six weeks; calls for regulatory markdowns on SFR and CRE seem to be less aggressive.

And, for private sector recapitalization deals of problem banks, the Treasury has even agreed to take discounts on its TARP investment, e.g.,in the South Financial case, the Treasury apparently agreed to a 63% discount of face even though common equity holders got some value.

So the consolidation of the US banking system seems to have been slowed down by regulators–to catch up with FDIC premium accruals–and the current taxpayer bailout is going out the back door of the U.S. Treasury as TARP discounts for larger regional banks rather than out the front doors of the FDIC.

Posted by AABender1 | Report as abusive

Sorry. Should read “FDIC’s future cash position ranges from about zero to say, -$100B.”

Posted by AABender1 | Report as abusive

As long as they are collecting premiums for it, I am fine with raising it to $250k.

It should not be retroactive for IndyMac unless the goernment had announced they were raising the limit before hand. A key reason for a cap in the first place is to force people to move their money around, prefereably into multiple institutions if they have a lot.

We are simply tolerating too much lack-of-failure. The baby boom generation is spreading the “everybody gets a trophy” mentality from their kids to everybody.

Posted by ErnieD | Report as abusive

As long as FDIC is in the business of insuring hundreds of billions of senior unsecured bank bonds through TLGP why not offer deposit insurance with no cap. If your gonna scam the taxpayer might as well make it look like they’re getting something out of it.

Posted by wolphkaat | Report as abusive

What’s the point of encouraging people to move money around, if you can so easily keep it at the same institution by opening several technically distinct accounts. The FDIC itself has web pages explaining exactly how to do this and to multiply your protection! Indeed, if you have a family and start being creative with POD accounts as well, there’s little practical limit to how much coverage you can get with one bank with the price being a bit of pointless convenience. Likewise: CDARS, tens of millions of dollars in protection, you deal with one institution, just more paperwork behind the scenes, and endorsed by FDIC. Do they want a cap or not? Right now we are in a silly no-man’s land where there is a cap for the “lazy” or uninformed. What public policy purpose does this middle ground serve?

Posted by bxg6 | Report as abusive