Both John McCain and Barack Obama have issued calls to increase the maximum coverage by the Federal Deposit Insurance Corporation (FDIC).
The question, of course, is how one raises the coverage limit above “unlimited“?
The basic insurance amount is $100,000 per depositor, per insured bank. This includes principal and accrued interest up to a total of $100,000. The $100,000 amount applies to all depositors of an insured bank except for owners of certain retirement accounts, which are insured up to $250,000 per owner, per insured bank.
Deposits in separate branches of an insured bank are not separately insured. Deposits in one insured bank are insured separately from deposits in another insured bank.
In other words, all a depositor need do to increase her coverage from $100,000 to $200,000 is to put $100,000 each in two separate banks. To insure $300,000, use three banks; to insure $1,000,000, use ten banks, etc.
So what does raising the ceiling do, exactly, other than make it easier for the rich (you know, those “greedy bastards who are ruining America”) to manage their bank accounts?
So long as our politicians continue to pander to idiots, expect nothing from government except idiotic policies and proposals.
(Note: Some suggest that the issue here is with businesses that must keep account balances above $100,000 just as part of their daily operations. I’m skeptical. Any businesses that are so large that they simply must keep huge amounts of cash in the bank are also large enough to figure out alternatives — or to perform their own due diligence and find especially solid banks in which to keep their largest accounts.)
In any case, I’m not “against” raising the FDIC protection limits, in any meaningful sense of the word “against.” I’m too busy being “against” the FDIC itself as a government bureaucracy; there’s no obvious reason its function can’t be provided privately, like any other form of insurance. I just sense that the ceiling-raising proposal is more of a pander than a reasoned, substantive proposal.
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Meanwhile, could someone explain to me how raising the (essentially meaningless) ceiling on FDIC insurance is supposed to help the supposed FDIC funding crisis and the widely-presumed looming taxpayer bailout that may result (current estimate: about $150 billion)?
To review:
The FDIC’s deposit insurance fund consists of premiums already paid by insured banks and interest earnings on its investment portfolio of U.S. Treasury securities. No federal or state tax revenues are involved.
That is, no tax revenues are involved until they are (i.e., a bailout).
The Federal Savings & Loan Insurance Corporation (FSLIC) was supposedly “self-funded.” Until it wasn’t. Cost to taxpayers: $26 billion in two separate bailouts (both of which failed in the end anyway).
The Pension Benefit Guaranty Corporation (PBGC) is supposedly “self-funded.” Until it won’t be. Cost to taxpayers: TBA.
(And don’t forget the National Flood Insurance Program. Supposedly “self-funded.” Until it wasn’t. Cost to taxpayers: $5 billion at last guess.)
And why is it, I wonder, that the obvious alternative to taxpayer bailouts never seems to be proposed, either by FDIC bureaucrats or by Congress: charging banks (or pension funds or flood insurance buyers or …) sufficiently high premiums to keep the entity solvent? Remember: Banks are required by law to participate in FDIC, so the entity can charge whatever premiums it needs to remain viable. (Note also that FDIC has been using a risk-based formula for premium assessments since 1991, making it even easier to fairly and equitably levy the appropriate premiums.)
Finally, a footnote: The one FDIC-like entity not in any apparent financial distress is the Securities Investor Protection Corporation (SIPC), which protects brokerage accounts much the same way the FDIC protects bank accounts. SIPC is doing just fine, thank you very much. “Greedy” and “reckless” Wall Street seems to be the only account-based industry that tends not to squander account holders’ assets. Go figure.
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And now it gets worse:
The U.S. Senate is proposing to raise Federal Deposit Insurance Corp. coverage for bank deposits to $250,000 per customer from $100,000 through 2009 as lawmakers seek support for the Bush administration bank-rescue plan.
The legislation would let the FDIC borrow from the Treasury “an amount or amounts necessary” to insure deposits, according to the text on the Senate Banking Committee Web site, temporarily lifting a $30-billion limit. Banks will not be required to pay higher premiums for the additional coverage.
Get more without paying more. By government fiat. Explain to me again how this is a “market failure”?
5 responses so far ↓
Link Dr Kenneth Noisewater // Oct 2, 2008 at 9:28 am
So what does raising the ceiling do, exactly, other than make it easier for the rich (you know, those “greedy bastards who are ruining America”) to manage their bank accounts?
Assuming that no depositors hold more than $100K in any single bank even though some could, it provides the opportunity for banks to receive more capital from depositors. At a time when some banks are teetering on the brink of insolvency due to investments in sub-prime mortgage securities and many other banks are scared to lend to anyone, the theory is that the infusion of capital from depositors will provide a cushion that might help unlock the credit markets.
That's the theory, at least.
Link Mark // Oct 2, 2008 at 10:03 am
"Any businesses that are so large that they simply must keep huge amounts of cash in the bank are also large enough to figure out alternatives — or to perform their own due diligence and find especially solid banks in which to keep their largest accounts."
Having been involved in a business that simply had to keep sums larger than $100,000 in the bank, I can say that this is incorrect.
A lot of times in the case of a small business, your cash situation is extremely fluid. If you bill your customers on a net 30 basis (as many businesses must do) but must pay your vendors on terms ranging from "on receipt" to "net 180", you will almost always have a situation where $ in bank < accounts payable < accounts receivable. This results in a situation where you will frequently have large sums of money in your account for a few days or weeks, only to have those sums dramatically reduced on the day(s) you pay your bills.
A business of, say, 20 employees making an average of just 30K per year will owe $50,000 a month just to make payroll. Then factor in rent, cost of goods sold, marketing expenses, shipping expenses, etc. It's fairly typical for a small business of that size to owe about $200-$300K per month in bills. Which means that you have to have more than that amount flowing through your account over the course of the month. Also because of the fluidity of your cash situation, it would be completely unmanageable (especially for a small business) to spread your deposits amongst multiple banks.
Of course, businesses can also be highly seasonal, with the bulk of receipts coming in all at once, but with bills relatively evenly spread out – in which case, you will have a significant period of time where you need to hold a particularly large sum of $ in your account.
As for being more selective about bank stability, it's not really that simple since in many areas there are relatively few banks to choose from. Add to that the fact that usually a bank is secure when a business starts using it; if the bank starts to become insecure and businesses start pulling their accounts and moving to other banks, that is the definition of a bank run, which means a good number of businesses are going to be left holding the bag, unable to meet payroll or pay their bills through no real fault of their own.
Link Jessica Edens // Oct 2, 2008 at 2:31 pm
This info is completely untrue. Any one bank can insure a person up to $1,000,000.00; it has to do with the way the account is titled; it does not go by a person's ssn. You really should get your information correct before you make the situation worse. I work for a bank and have been trained to understand the FDIC, and any reputable bank representative has had the same training.
[Kip replies: The info you cite: (1) does not apply to all depositors, (2) is available via the FDIC link I provided, and (3) is utterly irrelevant to my theses. So spare me the infantile "I'm a bank teller and know more than you do" lectures.]
Link Donna B. // Oct 3, 2008 at 12:45 am
Technical question: is a law firm required to keep each trust account in one single account? Couldn't a trust account easily go over $100,000?
If not kept in one account, what are the rules about splitting them into more?
I'm just curious. (and not a lawyer)
Link J. Philip // Oct 7, 2008 at 7:21 pm
I see nothing but upside and little downside to the change, and plenty of businesses need more than $100,000 of cash on hand.
This past week, I have had two clients sell their homes and realize, in both cases, over $200k in proceeds that they will put down on their next house. To have to put that money in 3 different banks in this day and age is impractical and silly.
Real estate investors who buy and rehab houses, even in a small market where homes cost $100,000, need 100k in liquidity if they do any real business. In the NY area, a $250k ceiling (where a $1,000,000 vulture fund is common for these types of investors) is really just a good start. 10 bank accounts is also impractical and silly.
Not your best post but you remain a gentleman and scholar.