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FDIC Might Be Underfunded: Should You Withdraw Your Money From Banks?

This article was written by in Banking. 19 comments.


The Federal Deposit Insurance Corporation (FDIC), the federal organization that insures that customers do not lose deposits held at banks when those banks run into trouble, is finding itself in trouble. For years, Congress hasn’t allowed the FDIC to collect insurance premiums from banks, bowing to the strong banking industry lobby. Now that banks have been failing and are expected to continue, the FDIC is in a tight spot. Despite the lack of funding, last year the government approved increasing insured limits from $100,000 to $250,000 per depositor through the end of 2009, and there is talk of extending the increased coverage.

If banks continue to fail and the FDIC does not have the funds to ensure deposits, what happens to the money held in those bank accounts? Well, you may not be able to withdraw your money when you want. But what are the realistic chances of this happening?

I mentioned recently that some money market funds are insured not to lose money for depositors, in addition to savings accounts, and Yana brought up the FDIC’s problems.

She mentioned that in this environment no bank is very safe, despite President Obama’s reassurance that Americans do not need to resort to withdrawing money from the financial system and storing the cash in mattresses. Yana is making changes in her saving philosophy to stay away from companies that are formed as brokerages with a banking arm. In some case, banks appeared on top of the game one day but failed the next, so it’s hard to predict the next to fall.

The FDIC is asking to increase their line of credit with the Treasury from $30 billion to $500 billion. If everyone agrees, with separate approvals from Congress, the Federal Reserve, the Treasury Department, and the White House, the increased credit limit will go a long way to cover deposits in a catastrophic situation. The FDIC’s current funding should be sufficient for the usual stream of smaller banks, but if the insurance organization were to take over Citigroup or another major global bank to prevent the major banking crisis, the reserves would be drained immediately.

I do not advise withdrawing money from savings accounts, but I do suggest diversifying across a number of banks. Do not leave more than $250,000 in one bank, unless you can also create a joint account. Stay within the FDIC limits for insurance, and spread your money out as much as possible. Many people suggest credit unions. Most credit union savings accounts are insured by the National Credit Union Association (NCUA), a federal agency like the FDIC, but the NCUA is also looking for more money to keep in reserve to cover failing institutions.

I expect FDIC’s $500 billion request to be approved and for there to be no problems accessing money if and when banks continue to fail. Maybe I’m just an optimist, but I think having a diversified portfolio of banking accounts, even if you don’t have savings up to FDIC insurance limits, is a good enough solution for now.

Right now, my savings accounts are distributing amongst Wachovia, ING Direct, TD Bank, HSBC Direct, FNBO Direct, E*TRADE Bank, Emigrant Direct, and a money market fund at Vanguard. Savings interest rates may go down to zero, but I’m confident enough that I won’t lose any money with this strategy.

Battling inflation is another issue. Sticking with high-yield accounts has worked so far, but with the stock market continuing its downward trend, you win when your account value doesn’t fall.

Bill Seeks to Let FDIC Borrow up to $500 Billion, Damian Paletta, Wall Street Journal, March 6, 2009
Letter from FDIC Chairman Sheila Bair to Christopher Dodd, Senate Chairman of Banking, Housing and Urban Affiars [pdf], March 5, 2009

Published or updated March 12, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes, also known as Flexo, is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about him and follow Luke Landes on Twitter. View all articles by .

{ 19 comments… read them below or add one }

avatar The Weakonomist

Good advice to diversify across many many banks. This would imply you have a bunch of cash. I’ve always felt there isn’t much point in having more than $100k in cash at any given time. My opinion might change someday when I actually have that much money to worry about.

As for the FDIC, if they run out of money the govt will give them more, that doesn’t worry me at all.

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avatar Common Sense

This kind of discussion only fuels the crisis. The majority of community banks are in no danger of failing and never have been. The FDIC will not “run out of money” because they are a part of the US Treasury Department. They will just get more if they need it.

When banks fail they are most often acquired by another, stronger bank. The FDIC works hard to insure that there is no gap between the closure of one bank and the re-opening under the new bank’s name. Information about the financial strength of all banks is readily avaialble on the FDIC’s web-site. You can compare actual dollars and ratios for the most recent quarter and previous quarters to see how your bank’s current performance compares to its past performance.

Fear and uncertainity fuel the crisis. Knowledge is power. There is no cause for concern with any account below the insurance threshold and very little cause for concern in financially healthy banks.

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avatar megscole64

I read somewhere, or heard someone interviewed, but can’t remember where, from an FDIC spokesperson that they had plenty of money to cover all anticipated bank closures with money left over in their budget.

Plus…not all banks that close end up forfeiting the savings right? I mean…if a local bank “fails” and is acquired then your savings are just under that bank now.

I’m with a credit union … and ING. I’m not sure how the credit union insurance applies…but we have nowhere nearly 100k anyway.

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avatar Luke Landes ♦127,455 (Platinum)

I read somewhere, or heard someone interviewed, but can’t remember where, from an FDIC spokesperson that they had plenty of money to cover all anticipated bank closures with money left over in their budget.

You’re exactly right. This is precisely what the FDIC had been claiming until the other day when they announced they’d be asking the government for the $500 billion credit line. Amazing how things suddenly “change” from one day to the next. It seems as if the FDIC was overstating their position to ensure there wouldn’t be a run on banks…

You’re also right about how banks fail under normal circumstances; an acquiring bank is immediately able to fulfill the obligations, but this system can break down if acquiring banks don’t step in quickly, and we might not be in normal circumstances.

That being said, like “Common Sense” above, I find it highly unlikely that there will be a problem. The FDIC will get the money it needs.

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avatar Kyle

Sheila Bair was on 60 Minutes Sunday evening and repeatedly stated that they are in no danger of running out of funds because they are backed by the U.S. Treasury.

She also mentions the source of the funds they use:
“No. it is money from our reserves which, and we are funded by insurance premiums that are assessed on banks. So, no it’s not taxpayer money,”

You can read the textual version of the story or watch the video here:
http://www.cbsnews.com/stories/2009/03/06/60minutes/main4848047.shtml

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avatar Luke Landes ♦127,455 (Platinum)

That was the message aired on Sunday to the public, but it’s not the same message the FDIC told Congress last week. The FDIC asked Congress for a $500 billion credit limit because they claim the $19 billion they had in reserves at the end of 2008 is not enough. Here’s the story from the Wall Street Journal.

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avatar UH2L

With investments giving negative returns, banks not giving much interest and possibly failing, it seems to me like the most concrete thing to do, (if you can afford and want/need), is to buy stuff. Stuff has utility. The dollar has a long way to go down in value/utility based on all of our deficits and low interest rates.

In keeping with this philosophy, I put a deposit on a car yesterday because the deal was too good to pass up and it was the optimal time to trade in my car before the warranty expired. I’m using cash to get the highest rebate.

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avatar RW

Please share your source of information. If this is just speculation please label it as such as well.

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avatar Luke Landes ♦127,455 (Platinum)

The primary source is the letter sent from FDIC Chairman Sheila Bair to Senator Christopher Dodd. It’s pretty clear what they are asking for. You can read the letter here:

http://s.wsj.net/public/resources/documents/fdic030509.pdf

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avatar rrgg

It doesn’t matter if the FDIC is underfunded because they are backed by the US government and will be funded further as needed in an emergency.

As evident from previous failures, so many people are already unaware of FDIC insurance. This kind of talk just worsens it.

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avatar Anca

Seems like consumers are getting a mixed message from the banking community: don’t make a run on your bank because you’ll cause it to collapse, but we’re not going to give you enough interest to make it worth your while to keep your money in our banks. Seems like just another industry that doesn’t give a care about customer satisfaction.

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avatar Dan

FDIC will always be able to meet its obligations since it’s backed by the full faith and credit of the US government (official party line). As our politicians have demonstrated, it’s easy to just keep issuing more debt to burden future generations. However, in order to avoid more taxpayer pain, FDIC has already and can continue to – increase the amount existing banks must pay into the FDIC fund.

I saw the 60 minutes interview with Bair – they already have some pretty dire/conservative projections of how many banks are going to fail (she wouldn’t give the quantitative estimate) and to what degree. In many cases, they actually find a private buyer and the FDIC doesn’t even lose much money (relatively speaking).

If you think banks are tumbling, there are triple short ETFs; if recovering, triple long. I tweeted and posted on some trades to accomodate both – hedging with long FAZ with call options on FAS. Up 27% today. Playing out ok over past few days. Interesting to see what happens following upcoming meetings on mark to market and uptick rules, etc. May see huge volatility in shares.

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avatar NJ Housefrau

Why not bail US out! Many of you have already thought of this; I’m sure it’s not original, but: let’s say there are about 305,000,000 people in the USA, and let’s say four people make up the average family–that’s 25% of that 305 million–about 76,250,000. Let’s say that is also the number of joint tax returns filed. And let’s say the remaining approximately 228,750,000 are single filers. And let’s say the joint filers are “bailed out” to the tune of $500,000.00 and the singles to the tune of $250,000.00. According to this computer’s calculations, the cost to the government would be about $38,125,000.00 for the “joints and $57,187,500.00 for the “singles–just slightly over $95,000,000.00 total. Isn’t that 9.5% of one (that’s right, one (1) ) billion $$$; and how many hundreds of billions have already been thrown down the crapper? “They” say we need to spend to help the economy get going! I don’t know about you, but I could do a commendable job with $500,000.00, even AFTER taxes! bk

P. S. If my calculations are incorrect, please let me know. I apologize in advance for my ADD if that is that case.

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avatar Jim

Your math is off.

Giving $250,000 to everyone in the USA would be $75 Trillion dollars.

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avatar NJ Housefrau

Reply to Jim (14) from NJ Hausfrau: Thank you for your comments. I should have realized there were a few more zeroes involved!

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avatar Jim

There really haven’t been that many bank failures lately. Less than 50 banks have failed so far in 2008 & 2009 combined.

By comparison during the S&L crisis in the 1980′s & early 1990′s we had over 200 banks for sever years in a row and it peaked with 900-1000 banks failing in a 2 year period of 1988 & 1989.

Also, it should be made clear that while the FDIC is backed by the US Treasury, the money to support bank failures is not tax dollars. THe FDIC insurance is funded by fees paid by the banks themselves. Its an insurance system funded by the banks. Its not a taxpayer handout. THe credit line from the US government is backup money so they have quick/short term capital if or when they might need it. They normally have $30B line of credit with the US Treasury.

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avatar Luke Landes ♦127,455 (Platinum)

In theory this is right. Unfortunately, banks stopped funding the insurance system. They didn’t want to pay the insurance fees to the FDIC, and the Congress let them do it, because at the time, FDIC believed their funds were sufficient. At the end of 2008, the reserve funded by the banks held only $19 billion, thanks to no banks paying in. The FDIC feels they need a credit line of $500 billion to protect against the failure of a major bank.

I’m not saying that the FDIC will have problems, but from 1996 to 2006, banks did not pay any money to fund FDIC insurance, so a major failure could extend beyond the reach of the FDIC reserves.

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avatar Jim

Also for reference, there are over 8000 banks in the USA.

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avatar thomas

Absolutely no way that the gov’t will allow FDIC to fail in this regard. I couldn’t think of a bigger nightmare situation as far as the total demise of our financial system.

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