Will Bank Rates Fall to Save FDIC Insurance?

The financial crisis seems to have simmered down, and savings rates among Americans are on the rise, but there may still be more bumps in the road ahead for the banking industry. Shoring up FDIC insurance may pose a new threat to bank profitability and drive bank rates on various accounts even lower.

The Gathering Storm

As a result of payouts to protect consumer deposits through the banking crisis of the past year, the FDIC insurance fund has come under tremendous strain. With the list of problem banks continuing to grow and some bank losses not yet fully realized, additional demands on the insurance fund are likely. More payouts from the FDIC means additional money will be needed to replenish the fund. Naturally, this raises the question of where this money will be found.

Bank Rates or Higher Taxes: Two Ways to Pay

Essentially, there are two possibilities for bailing out the FDIC insurance fund. One is to use taxpayer money, while the other is to increase the insurance levy on banks in the FDIC system.

As a bank customer, your reaction might be that it makes no difference to you--that you pay one way or the other. However, there is a difference.

If FDIC insurance premiums are raised, the burden of paying for insurance falls disproportionately on savers. It won't be obvious, but those higher premiums paid by banks will show up in the form of lower savings account rates, money market rates, and CD rates. Considering that borrowers, not savers, were at the root of the financial crisis in the first place, these lower rates may be hard for many bank depositors to swallow.

While no one likes higher taxes, using taxpayer money to bail out the FDIC fund would at least spread the burden more evenly. That may be wiser than penalizing savers, who are critical to stabilizing the banking system.

Source: The Coming Deposit Insurance Bailout • Sep 01, 2009 • The Wall Street Journal:  http://online.wsj.com/article/SB10001424052970204731804574385072164619640.html