I remember going to the bank with my mother when I was little. I wasn’t tall enough to see the counter where she filled out deposit slips or the teller’s hands sliding receipts back under the partition. I was at eye level with the silver placard that bore the logo of the FDIC and stated that deposits were insured up to $100,000. I also remember hearing radio ads for banks, and the low, fast radio equivalent of fine print that came on after the jingles and sound effects. The last thing they said was always, “Member F-D-I-C.” When I was old enough to ask what that meant, I learned that the Federal Deposit Insurance Corporation was established after the Great Depression so that people wouldn’t worry about their money if banks collapsed.
We’re familiar with images of crowds crushing against Art Deco-style iron gates, arms in the air, waving slips of paper. The next picture in the textbook is always a bread line. The purpose of the FDIC is to ensure that this scenario doesn’t play out again, and recent legislation has strengthened the FDIC’s regulatory power. In 1933, the FDIC insured deposits up to $2,500 (roughly $40,000 today, adjusted for inflation). The limit is now $250,000.
How is the FDIC funded?
So, when banks fail, where does the FDIC get money to return deposits to customers? Financial institutions covered by the FDIC are required to pay into the Deposit Insurance Fund (DIF) on a sliding scale based on how much money they have, and how risky their investments are. The FDIC determines these rates, or assessment bases, and adjusts them to maintain the DIF. The Dodd-Frank Act of 2010 requires the FDIC to hold at least 1.35% of the value of all estimated insured deposits by 2020. Since 2008, the FDIC has paid $76 billion to customers of 345 failed banks, and the reserves have fallen. There are two ways for the FDIC to rebuild its fund: by suing officers and directors of failed banks, or by raising its assessment bases to require banks to pay greater amounts into the fund. The FDIC is also authorized to borrow up to $500 billion from the Federal Reserve—an amount that has grown steadily since 1933—but so far, the FDIC has not taken a loan.
Adjusting to the Climate
While many banks and executives are still under investigation by the FDIC, it has authorized over 100 lawsuits claiming a total of $2.6 billion (ibid. The Washington Post). Last April, the FDIC also raised the fess that banks must pay when purchasing certain securities. According to The Wall Street Journal, “The new rule makes it more expensive for U.S. banks to borrow in the overnight securities repurchase, or ‘repo,’ market, in which banks borrow from money-market funds and other investors, using Treasurys as collateral.” Any increase in the fees banks must pay may ultimately be passed on to customers. This could spell fewer loans and a resulting decrease in bank profits. But increased payments to the FDIC should help rebuild the fund’s reserves in case of future bank failures.
The limit on insured funds has increased since I was a kid running errands with my mom, and I’m still nowhere near the upper limit (from 1992 or today) in my Simple account (with Simple, my deposits are held by The Bancorp Bank in FDIC-insured products). But the FDIC has played a critical role in stabilizing the banking industry since the end of the Great Depression and through numerous recessions since then. We all sleep better for it.