Will FDIC insurance limits just worsen the banking crisis?

People with uninsured deposits at IndyMac Bank learned the hard way that the Federal Deposit Insurance Corp. wasn't kidding about its insurance limits.

But will the FDIC be able to stick with its rules as the number of failed banks rises?

My column in The Times this weekend looks at some of the risks posed to the banking system by the same deposit insurance that's designed to protect the system. One issue is that the expanded awareness of the insurance limits, after IndyMac's high-profile failure, could hasten deposit runs as rumors fly about other troubled banks.

A run on deposits can virtually guarantee a bank's failure -- and make things worse for the FDIC, which already figures its caseload is going to balloon because of bank loan losses from the housing bust.

IndyMac had about $1 billion in uninsured deposits.

I note that some bank industry analysts think it would make more sense for the government to protect all deposits rather than maintain the insurance limits. Japan decreed blanket protection from 1997 to 2002 amid a severe loss of faith in its banking system.

Mike Shedlock (Mish) at Global Economic Trend Analysis has another idea about deposit insurance: He says it should be scrapped entirely, except for unlimited insurance on checking accounts. Read his views here.

Comments

[sckater]

I find it difficult to believe that in this age people that are fortunate enough to have more than the FDIC limit in the bank did not think that the limit would hold in a crises. In fact other than major businesses or banks the government or insurance companies never do the right thing they watch there own back and always stick to the rules.

[gerrrg]

Why not, instead of eliminating the ceiling, adjust it annually to the CPI or some similar index? The insurance was meant to encourage the middle class to invest, wasn't it? If this is the case, you'll do as well to simply adjust the ceiling (to prevent the same problems as the AMT), while keeping pressure on banks and S&Ls to maintain fiscal responsibility. Eliminate the ceiling and the financial institutions have a lot less fear in making mistakes - someone will always bail them out.

[Martha Vandellas]

Your statement "...IndyMac had about $1 billion in uninsured deposits..." is objectionable!

Firstly, IndyMac is the second banking organization to have failed in US history and its failure should never be taken lightly, including "word smiths" who will [unfortunately] profit from reinventing the facts that led to its failure!

The FDIC imposes limits on deposits it insures, which institutions elect to carry, to guarantee an organization's ability to do business and that it is financially sound and safe to continue with future business. Along with these guarantees, the organization must ethically follow certain guidelines set forth by the FDIC. IndyMac failed all of these points.

Finally, It's the depositor's responsibility to be responsible when the organization cannot or will not show responsibility. Therefore, permit this regrettable event to be a wake-up call to all depositors who have more on deposit than the allowable FDIC insured limit. If you worked hard for these dollars, then do something about your hard work before it becomes a crisis!

P.S. Heaven help us all if federal agencies such as the FDIC, FHLMC, and FHNM are further compromised by those who would attempt to lessen their importance in providing the very rules, that when properly followed, benefit far more people than harm!

[Aaron]

The deposit insurance is an unbelievably important part of the American economy... having said that, I was stunned that anybody at all lost money in the IndyMac failure. I can't conceptualize that people with that much money didn't either have it in the market, even if in a low-risk, low-yield instrument, or at least didn't structure their accounts around various banks.

[Nick]

One word: CDARS

[Bill]

"With that much money"?

If you had $1 million in IndyMac and lost the excess, that's bad financial management.

if you had $300,000 in an IRA and now lost the $50,000 in excess of the FDIC $250,000 limit for retirement accounts, that hurts.

Further, if you are retired and were smart you should have your money in zero-chance-of-loss instruments like savings accounts and CDs, and if you're retired I certainly HOPE you've got more than the FDIC limit of $100,000.

[Michael Gonsior]

Insurance on bank deposits, if any, should be provided by private insurers, not by the government. Private insurers would be motivated to monitor bank operations to minimize their risks of loss. Government employees couldn't care less whether banks operate prudently, as their jobs are secure regardless of losses, and they know Congress will step in to bail out the FDIC if claims exceed its assets.

Just as we have complete separation between church and state, so should we have complete separation between government and the economy.

[martscan]

Mish nailed it. A "10".

[john]

I was reading this report about the fdic and banking crisis; it's interesting, check it out.
http://blackandwhiteprogram.com/report/the-fdic%e2%80%99s-role-in-recovering-failed-banks-and-thrifts

[A Sore Loser]

In response to: "Finally, It's the depositor's responsibility to be responsible when the organization cannot or will not show responsibility. Therefore, permit this regrettable event to be a wake-up call to all depositors who have more on deposit than the allowable FDIC insured limit. If you worked hard for these dollars, then do something about your hard work before it becomes a crisis!"

What about people like me, who work hard and are responsible and verified with an IM representative that my deposits were properly insured a week before the FDIC took over. I was assured (likely on tape somewhere) that all was safe and 100% insured. Then following the failure and the FDIC review, they said I have uninsured deposits. When mentioning the assurance of the bank employee, the FDIC representative stated: "Bank employees do not know much about how FDIC insurance rules work." So whose can you trust and whose responsibility is that?