Looking a Gift Horse in the Mouth: Thoughts on Extending FDIC Insurance Coverage

Last week, President Obama signed a bill which extended the $250,000 ceiling on FDIC deposit insurance through the year 2013.

Until late last year, the limit had been $100,000. It was then increased to $250,000 to shore up depositor confidence in the midst of the banking crisis. This was supposed to be a temporary measure, through the end of this year, but now it has been extended for four more years. Realistically, it’s now hard to envision the limit reverting back to $100,000.

For people with savings accounts, certificates of deposit, checking accounts, money market accounts and any other eligible deposit accounts, this is obviously nothing but good news in the short term. It allows them to invest with confidence, and without having to spread deposits around so much to keep accounts under the insured limit, or worry about how the terms of their certificates of deposit mesh with the expiration of the higher limit.

For the government, this is a step to further bolster confidence in the banking system, and one which does not appear to have an immediate cost. And there’s the rub. Guarantees cost nothing when they’re first made, but as we’ve found out over the past year, they can become extremely costlywhen things go wrong. So, call this one a short-term gain for depositors, but possibly a long-term loss for taxpayers.