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Ask the expert: Does the debt ceiling debate threaten deposit insurance?

July 21, 2011

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: Of all the things said to be threatened by the debt ceiling debate -- bond payments, social security checks, etc. -- one thing I haven't heard mentioned is FDIC deposit insurance. Since this is a federal program, couldn't our deposit insurance be at risk if the government runs out of money? After all, owners of savings accounts, money market accounts, and CDs have gotten the short end of the stick from government policies so far.

A: Even though FDIC deposit insurance is a federal program, it is not likely to be an immediate victim of a possible federal government default. In the long run though, anything is possible if things reach such a dire outcome.

The reason why deposit insurance wouldn't be immediately affected by a federal government default is that deposit insurance is funded by an assessment on banks, and not directly by the federal government. Although the FDIC is a federal agency, it does not receive any Congressional appropriations for its operations.

However, that does not mean that deposit insurance would be completely immune if the federal government fails to live up to its responsibility to find a budget solution. For one thing, while the vast majority of FDIC funding comes from bank assessments, the agency does receive a minute portion of its revenues from interest on U.S. Treasury securities.

A bigger worry might be that if the U.S. government actually defaults on some securities, it is possible that the financial chaos that would follow could cause a spike in bank failures that would overwhelm the insurance fund. After all, this fund is just over 1 percent of insured deposits. It is predicated upon failures being rare exceptions, not a widespread epidemic.

In short, savings accounts, CDs and money market accounts don't seem especially vulnerable to a federal default, but like a surprising number of things we count on every day, deposit insurance could be subject to disruptions if the government cannot pay its bills.

Correction (July 22, 2011): This post previously misstated that the FDIC is a federally funded organization whose ability to administer the insurance fund might be hampered if the federal government cuts off funding to its agencies. The FDIC does not receive Congressional appropriations for its operations and instead is funded by industry assessments as well as earnings on U.S. Treasury securities. For more information, visit the FDIC website.

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Your responses to ‘Ask the expert: Does the debt ceiling debate threaten deposit insurance?’

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Wayne Karn

24 August 2011 at 11:59 pm

I purchased two Universal lLife Insurance polices in 1991, with a well known credible company. Because of interest rates at the time of purchase I'm locked into a 4 1/2% return on both the accumlation account and deposit account, which is basically a conventional savings, but with a 10k annual deposit limit. The two accumulation accounts allow 90k total annual deposits. It's been twenty years and they have always honered the set 4 1/2% rate that I signed for twenty year's ago. They are considered "locked-in" as long as I maintain the accounts. My question is: Can the Feds or any outside insurance regulatory group force chang to the companies on going policy? And, eventhough they have proven to be credible could inside policy change be retroactive on money earned to date. Thank you and I look forward to your reply.

Hannah Thoreson

22 July 2011 at 3:27 am

With all due respect Mr. Barrington, I wrote an article a few weeks ago covering this exact issue, and nothing I found makes your math look accurate. Yes, you're the expert, and I'm just curious and like to write things: but I think this is worth having a look at if you have a moment. Unless there's some kind of inside info I haven't got, it appears that the FDIC's "insurance fund" is as mythical as the Social Security lockbox. http://www.westernfreepress.com/metablog_single.php?p=1423 Thanks! - HT

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