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Will FDIC insurance limits just worsen the banking crisis?

July 27, 2008 | 12:33 pm

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.

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