FDIC

"Bank failures are caused by depositors who don't deposit enough money to cover losses due to mismanagement"- VP Dan Quayle

How secure is your bank? So far in 2009 the FDIC has rescued 188 failed banks such as Bank of Honolulu, First Bank of Idaho, and California National Bank. If your bank fails, what happens to you?

If your bank is NOT insured by the Federal Deposit Insurance Corporation (FDIC) then you are out of luck. You will most likely lose all money and get nothing.

What is the FDIC?

TheSimpleDollar.com has the answer. The FDIC is an organization run by the government of the United States to sell insurance policies to banks. Most banks in the US buy the insurance and pay a fee to the FDIC for coverage. FDIC insurance covers checking accounts, savings accounts, certificates of deposit, most money market accounts, and cashier’s checks. It does not cover stocks, bonds, mutual funds, US treasuries, or safe deposit box contents.

Under current law FDIC insures investors up to $250,000 per depositor per account type. I always thought the limit was per bank but a report by the Congressional Budge Office (CBO) says that separate coverage applies to an individual account, a joint account and an IRA account at the same bank.

What Happens When an FDIC Insured Bank Fails?

The FDIC takes over that bank and all of the accounts held there. Under the “purchase and assumption” method, the FDIC sells the failed bank to another bank who takes over the accounts and some (or all) of the loans. This is often done over a weekend. You'll wake up Monday morning and discover your money is with a new bank. This happened when Wachovia failed and was taken over by Wells Fargo.

When there is no buyer, the FDIC liquidates everything in the bank and then issues payouts for depositors up to the $250,000 limit. The process is straightforward, usually involving minimal hassle from the customer, and frequently paid within a week.

Bottom Line

Before 2008 the FDIC limit was $100,000 per depositor. Congress raised this to $250,000 as a temporary measure during the banking and Wall Street crisis. It will return to $100,000 on Jan. 1, 2014 unless Congress extends the law.

When the FDIC was created in response to the Great Depression, The Banking Act of 1933 set the recovery cap at $2500 (about $40K today if adjusted for inflation). The limit was quickly rasied to $5000 in 1934 (=$80K today) and to $10,000 in 1950 (=$85K today). In 1966 the FDIC limit became $15,000 (=$95K today), and rose again three years later to $20,000 (=$112K today). It became $40,000 in 1974 (=$166K today) and $100,000 in 1980 (=$250K today).

I find it interesting that each time the limit is adjusted "for inflation" the amount of coverage (in today's dollars) keeps going up. From $40K equivalent in 1933 to $250K today. If you think about, who is the government protecting here - the average citizen or wealthy backers? How many Americans have more than $40K saved in a bank? According to a study by the Congression Budget Office (CBO), only 1 percent of all accounts exceed $100K. Even families at the highest income level in 1998 had an average checking account balance of only $19,000. I love this quote from the CBO report, "The one certain result of raising deposit insurance coverage is increasing the costs of insurance [for banks and the government]."

References

The CBO study on FDIC limit and inflation, http://www.cbo.gov/doc.cfm?index=3474&type=0
More facts on the FDIC at http://www.enotes.com/everyday-law-encyclopedia/fdic
Inflation Calculator http://www.westegg.com/inflation/infl.cgi