Will the FDIC go Broke?

After the recent market meltdown and subsequent federal bailouts, public confidence in the US economy is on the wane. Sure, if you’ve got less than $100,000 in a deposit account, you are covered by federal insurance. But the obvious next question is, “what if the FDIC goes broke?”.

On September 25th, John McCorry, the executive editor of Bloomberg published a piece in which he questioned the stability of the FDIC and pondered how much is needed to cover their losses. After all, the reserve fund of the FDIC stands currently at $45 billion, which sounds paltry in comparison to the amount of money being pumped into banks to keep them afloat, let alone the amount it would actually take to cover the deposits of customers in the bank failures that could still potentially come our way. He wrote that “emergency federal lending to the FDIC could swell the cost of government rescues of failed financial institutions to more than $400 billion—not including the $700 billion general Wall Street bailout now under discussion in Congress.” The FDIC is required to pay back any such federal lending, and such debt is repaid through premiums that banks pay to have their customers’ deposits insured. Banks are willing to pay these premiums because it helps uphold the key ingredient of the banking system–trust.

In direct response to this article, Andrew Gray, Director of Public Affairs for the FDIC, reassured the public that “Congress, understanding the need to ensure that working capital is available to the FDIC to provide bridge funding between the time a bank fails and when its assets are sold, provided broad authority for us to borrow from Treasury’s Federal Financing Bank.”

In addition, because the banking system is so dependent on the faith of the public, which is partially reinforced by the federal backing, the FDIC itself will receive income in perpetuity because any surviving banks will pay any premiums necessary to have that seal of trust on their front door. He went on to state that, in the only instance when the FDIC actually had to borrow money from the Treasury in the early 1990s, the money was paid in full with interest in two years. In a further move to reassure the public, he reminded us that “no depositor has ever lost a penny of insured deposits, and never will.”

Historically, the FDIC has a good track record of repaying its debts to the Treasury, beginning with its $289 Million initial funding when it was established in 1933, which was repaid in full by 1948.
In some cases, such as JP Morgan Chase Co.’s acquisition of WaMu, the fund is not dented by a bank failure. In others, such as the takeover of Wachovia by Citigroup, the exposure is potentially far greater as the FDIC is covering all losses above $42 billion. Earlier, with the failure in July of IndyMac, the fund fell below its 1.15% reserve requirement (the total fund divided by the $4.29 Trillion in deposits that are insured), so the FDIC is holding mandatory meetings this month to develop a restoration plan for the fund.

Stay tuned as the revised Bailout Bill that passed the Senate on Wednesday and goes to the House on Friday will also have a large impact of its own, as it will increase the consumer protection on FDIC insured accounts to $250,000 if it passes. This increase will match the amount of insurance coverage in place since the Federal Deposit Insurance Act of 2005 passed, which protects an Individual Retirement Account at a member bank up to $250,000. As this increases the potential liabilities of the FDIC, they will certainly need to tap their Treasury lines of credit at some point, but it is reassuring that they have the full backing of the government as it is obviously in everyone’s best interests to make sure that the money of the people is protected and guaranteed. If the bill passes the House vote, it will give the FDIC unlimited borrowing authority to cover bank losses. Though heavily criticized by some, most believe it is necessary to shore up the confidence and trust to prevent the bank runs that crippled the country further in the early 1930s.

Keep in mind that credit unions are covered through the National Credit Union Share Insurance Fund, and if your deposits are with a credit union you can find most of the answers to your questions and concerns here. For more information on what is covered by the FDIC, see our previous post “Bank Fail! Is Your Money Safe?”.