How Safe is FDIC Insurance?

fdic, fdic insurance, bank insurance, insurance for banks

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The common opinion of most Americans when it comes to whether FDIC insurance, if they ever think about the FDIC, is that it provides guaranteed security. One specific example came from my own son as I was writing this article. He said he was told in his high school’s academy of finance class that the FDIC is the Bank’s regulatory department and that it is very safe. You may even agree, but the facts say something different.

The FDIC’s website gives information regarding the current amount of deposits the FDIC insures and the total amount of funds the FDIC has to cover those insured funds. As of December 31st, 2016 the estimated insured deposits (including U.S. branches of foreign banks) totaled $6.917 trillion. The very next paragraph states the Deposit Insurance Fund (DIF) during that very same quarter totaled $83.1 billion or $.0831 trillion. Do the math. Take $.0831 trillion and divide by $6.917 trillion.  You get 0.012013878.  That’s just above 1%!  Simply put for every $100 of insured deposits the FDIC has $1 to “insure” those funds. Does that sound safe to you?

Remember what happened in 2008 to America’s economy? You may have suffered losses. The banking industry clearly did. It got so bad in 2008 and 2009 that the FDIC’s DIF was completely depleted! The FDIC was insolvent or, in other words, bankrupt. In order to remedy the situation in March 2009, Sheila Bair, head of the FDIC, announced that the FDIC intended to levy a one-time fee on member banks to cover the looming shortfall. Small and regional banks protested vigorously, noting that they were effectively being punished for remaining sound, while Wall Street and a few notorious banks played with fire. They have an excellent point. Note the strong language used by ICBA president Camden Fine:

“The group — made up of mostly small town, rural banks that never traded in exotic mortgage-backed securities — is outraged [by the proposed levy].”

[Independent Community Bankers of America] ICBA President Camden R. Fine compares the FDIC to Japan’s attack on Pearl Harbor. He calls the special assessment on the nation’s 8,000 community banks “crippling,” and blamed “greed, incompetence and sins of the Wall Street firms that so crippled this nation’s economy.”

“We have now come to the point where the ‘systemically unimportant’ banks of Main Street must, along with the nation’s taxpayers, bail out the ‘systemically important’ Wall Street firms,” Fine said. “Not only are a handful of Wall Street CEOs holding a gun to the taxpayers’ heads, they have the banks of Main Street America looking down the barrel as well.”

Fine said it is ironic that on the day the special assessment was announced, struggling CitiGroup received another government bailout. He says community banks are strong and are doing the economic work the bigger banks should be doing.

“During the fourth quarter of 2008, community banks had the largest percentage increase in lending across the industry,” Fine said. “For every dollar paid in premium assessments, a community banks’ ability to make loans and support economic recovery will be reduced at least eightfold.”

Fine’s point, besides pointing out that small banks were being forced to shoulder the burden for irresponsible banks (which is galling enough in itself), is that every dollar sucked out of a small bank represents eight dollars of loans that cannot be made in local communities. The truth is that economic recoveries are mostly made due to small business expansion and hiring, yet the effective result of the FDIC levy would be to siphon recovery fuel from small communities and transfer it to the big players. This is a very big deal.

After listening “carefully” to these concerns, the FDIC voted on May 22, 2009 to go forward with the special levy:

The Board of Directors of the Federal Deposit Insurance Corporation today voted to levy a special assessment on insured institutions as part of the agency’s efforts to rebuild the Deposit Insurance Fund (DIF) and help maintain public confidence in the banking system. . . . . .The special assessment will be collected September 30, 2009.

Just like that, millions of dollars flowed from economically responsible financial institutions to pay for irresponsible decisions and cover funds that were supposedly “insured” by the FDIC. The money has to come from somewhere.

Common opinion about the FDIC also claims the government will back the FDIC in the event of a short fall. It’s easy to see that shortfalls like we saw in 2001 and 2008 could happen again. Will the government make up the shortfall? Where does the money come from? The primary sources of “income” for the government are taxes and the Federal Reserve printing press. This sounds like a similar story, as stated above by Mr. Fine. This time, the burden shifts, in part, to the American people when taxes are used to cover the FDIC shortfall.

Given the facts, common opinion about the safety of the FDIC is completely full of holes.  A 1% reserve is not safe. Why not choose a different option one that truly operates on a 100% reserve system? You heard that right. A 100% reserve system! Now that’s safe! If you want to know more about a 100% reserve system feel free to contact us at Paradigm Life.  We will be happy to assist you.

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