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

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