Strength of FDIC Fund Could Affect Bank Rates and Security

It has been widely reported that the FDIC’s deposit insurance fund has been rapidly declining, raising concerns that it might require special funding soon to support the growing number of banks classified as troubled. In response, the FDIC has publicly clarified its accounting to show that the fund is not actually declining nearly as rapidly as thought.

The key issue: the FDIC is setting aside a portion of its fund as a reserve contingency to handle troubled banks. As this reserve has grown larger, the figure the FDIC reports as remaining in the fund has declined. However, with troubled banks already somewhat accounted for by the reserve, this is not as big an issue as it had appeared. In fact, since the reserve has not yet been heavily drawn upon, the FDIC insurance fund actually grew in the second quarter of 2009, from $41.5 billion to $42.4 billion, when the reserve is included in the total figures.

The health of this FDIC insurance reserve is significant to depositors in two ways. Naturally, having that fund in healthy condition is a source of reassurance for all bank depositors. Each person likes to think his or her bank is healthy, but since potential problems tend to be buried deep inside a bank’s accounting structure, it’s always good to know the FDIC fund is there as a backstop.

The second significance of the health of the FDIC fund is that is could help savings account interest rates, along with money market rates and CD rates. When the fund is drawn down, the FDIC has to charge higher insurance premiums–and this tends to come out of the bank rates available to depositors. A healthier FDIC fund should mean less of a future burden for depositors to shoulder.