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Any chance of the FDIC insured deposit level going back down to $100K?
January 6, 2010 12:23 PM   Subscribe

FDIC insured deposits: any arguments for going back down to $100,000 anytime soon?

In mid-2009, President Obama signed into law a bill to extend the $250,000 insured deposit limit until 2013. My understanding is that this limit was increased from the $100,000 we're all been used to during the financial crisis when there was serious doubt about the health of many of the nation's largest banks. Now that the immediate danger seems to have ebbed, especially with many banks paying back the money they received under TARP, are there any credible/rational arguments for returning the insurance limit for individuals back to the $100,000 level?

I understand that several smaller banks continue to fail, but does the $250K limit really help enough people that it outweighs returning to the $100K limit, thus limiting the FDIC's responsibility for those deposits?
posted by midatlanticwanderer to Work & Money (11 answers total) 3 users marked this as a favorite
 
Kind of a theoretical question for AskMe, but what the hey.

The FDIC operates--or at least pretends to operate--as an insurance company. It's ultimately backed by taxpayer funds, so the odds of insolvency are the same as the odds for the insolvency of the federal government (shudder), but it's supposed to operate at about a break-even basis.

Insurance companies do this by taking in premium, which they invest, and eventually use to pay for losses. The FDIC gets its premium in the form of fees assessed on the banks it insures.

Like all types of insurance, higher limits come with higher premiums. Higher potential losses mean more capital reserves, and that takes, you know, money. I don't know whether the law Obama signed increased FDIC fees, but I kind of doubt it. Either way, the higher limits aren't necessarily good in the long run. If the fees go up, that means that banking got that much more expensive. If they don't, the likelihood that the taxpayers will wind up covering the eventual FDIC insolvency go up. Neither is really a good outcome.

As the number of people with bank accounts in excess of $250k are vanishingly small--$250k is a ridiculous amount of liquid cash for an individual, and institutions have better ways of taking care of their money than checking accounts--the costs probably outweigh the benefits.
posted by valkyryn at 12:33 PM on January 6, 2010


Valkryn's answer is correct, but no one here can answer your question because we're not privy to regulators' intent.
posted by dfriedman at 12:49 PM on January 6, 2010


The FDIC did increase their fees to cover their expenses paying out insurance on a bunch of failed banks. (More info in NYT here).)

I think valkyryn mostly has it right—a very small percentage of a bank's depositors are ranking in over the $100,000 limit. Not simply because that's a large amount of liquid capital for a person to have but because those individuals who have that sort of money typically know better than to keep it in one single account—that's what CDARS is for, though it limits full liquidity by converting most the capital into CDs.

Still, the additional total cost is passed back on to the banks, but it's something approaching negligible anyway though I wouldn't put it past banks to pass the costs on to those who have sub-$100k accounts, since banks rarely charge maintenance fees for accounts with $100k+ in them. Most banks are happy to cover the insurance and have such good depositors in any event.

If anything, the banks might at some point pressure the FDIC to return the requirements back to $100k, but for now it probably makes more sense to keep them put; the number sounds more secure to the unwashed masses with under $100k to begin with.
posted by disillusioned at 12:50 PM on January 6, 2010


Aha, thanks for the insights, all.
posted by midatlanticwanderer at 12:53 PM on January 6, 2010


I could see the FDIC rolling back insurance to lower limits if there is massive deflation.
posted by infinitewindow at 12:54 PM on January 6, 2010


The $100k limit dates all the way back to 1980. Adjusted for inflation, that's $262k. So you could argue they are just resetting it to the right value.

I don't know what arguments there are for not making the limit inflation-indexed. The government always seems to run into trouble when they don't, for instance with the Alternative Minimum Tax.
posted by smackfu at 12:58 PM on January 6, 2010


There have been calls over the years to increase it due to inflation, so this was just something that was opportunistically rolled into the legislation. I think it's going to stick going forward, personally. It wasn't by itself an emergency measure.

Since the ultimate goal is NOT that the FDIC only has to cover part of the deposits, but that the behavior of depositors is to diversify across as many banks as needed to be under the limit, it can't really be -- as you seem to believe by your final sentence -- a cost-limiting measure. If you spread your eggs across multiple baskets, you and the banks are presumed to act in more rational and predictable ways.

In fact, ultimately, you should remember that the point of the FDIC is to prevent bank runs (as seen in It's a Wonderful Life). These can destroy a lender's liquidity in a snap of the fingers, and force an FDIC takeover, whereas the insurance means the depositors might respond to a bank's weakness only gradually.
posted by dhartung at 1:12 PM on January 6, 2010


The $100k limit dates all the way back to 1980. Adjusted for inflation, that's $262k. So you could argue they are just resetting it to the right value.

I came in to say this.
posted by onshi at 2:04 PM on January 6, 2010


With respect to the numbers of people who might have >$100-K deposited in a bank, there are a lot more of them than you think. They are most likely to be older with memories of the Depression and World War II. They are probably, counterintuitively, most likely to be found in middle and lower middle working class neighborhoods. They might be the guy who worked in the trades, built up a little business, and sold it when he retired. They might be the family miser who lived in squalor, but, at retirement, had almost every penny he ever made. They might be the mama's boy who lived with his parents, never married, never had kids, and never supported a home on his own. They are, it goes without saying, unsophisticated and / or profoundly risk averse. They don't understand money, and don't trust "investment advisers" or anything that smacks of "Wall Street."

That having been said, with aging, even the relatively more on-the-ball sorts often lose track of things like making sure that their deposits total within the insurable limit. And because these sorts of folks (a) are usually too unsophisticated to be expected to understand the ins-and-outs of deposit insurance (e.g., it goes not by account but by titular registration), and (b) are often no longer in a position to stay on top of things anyway, I would argue that, for retail (i.e., non-commercial, non-professional) deposits, there should be no limit for deposit insurance purposes. At the end of the day, it wouldn't cost the taxpayer much especially after factoring in the additional costs to the taxpayer of the extra support people require when they are wiped out financially.

This is more than I planned to type, but oh well.
posted by SuzB at 2:47 PM on January 6, 2010


FDIC insured deposits: any arguments for going back down to $100,000 anytime soon?

The limit is per-account-class per-depositor per-bank, so if I've got $500,000 with the $250,000 limit I can split my money between two banks and still be completely covered. A lower limit encourages more people to split their money between more banks.

So, if we think people splitting their money between several banks is a desirable thing, lowering the limit would encourage more of that.
posted by Mike1024 at 4:08 PM on January 6, 2010


A big reason, and ultimately the only reason, for the FDIC to exist is to instill confidence in banking institutions. To convince people that parking their extra money in a bank is a safe thing to do. To that end, the increase is only a good thing and I can't see any reason to lower it. Even if there were to be tremendous deflation.

The added risk to the FDIC probably isn't that much. There are fewer people with $250,000 in a bank than there are people with <=$100,000.
posted by gjc at 5:09 PM on January 6, 2010


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