Bank Deposit Insurance Set for Permanent Increase?
March 10, 2009
A new bill introduced in the 111th Congress by Representative Barney Frank (D-Massachusetts) could make permanent the increase in deposit insurance to $250,000 per depositor. H.R. 786, which was introduced on February 2, 2009, would also increase from $30 billion to $100 billion the borrowing power of the FDIC. The new bill could end the ambiguity regarding the temporary increase in deposit insurance slated to end December 31, 2009.
Deposit Insurance History
The FDIC was created in 1933 to stabilize the banking system with a federal guarantee of deposits in member banks. The Depression-era saw a run of bank failures in which thousands of banks failed and millions of Americans lost their savings. The FDIC was formed to prevent another national bank run from occurring. The depost insurance limit, originally set at $5,000, was gradually increased over the years until it finally reached $100,000 per depositor in 1980. Then for the next 28 years, a period that included the major bank and savings & loan crisis of the 1980s, the insurance limit remained set at $100,000. It wasn't until last fall in a period of financial crisis that lawmakers finally increased the level of deposit insurance. Their temporary increase from $100,000 to $250,000 has helped provide stability and confidence in the banking system.
Who Does the Bill Help?
The biggest benefactors of the new bill may be individuals with large amounts of money in bank savings accounts, money market accounts, checking accounts, and certificates of deposit. Large-dollar depositors will be able to place more money at fewer banks and will be able to more readily take advantage of the bank rate specials they find at a site like MoneyRates.com. In addition, due to the large-dollar deposits at stake, the competition for bank deposits may increase the highest rates available on deposit accounts.
Banking customers who keep small deposits in checking accounts or money market accounts may also benefit. The second part of the House Bill increases the borrowing power of the FDIC from the U.S. Treasury. This could prevent the necessity of special FDIC assessments on all member banks to raise money in the insurance fund to pay out for the continued wave of bank failures that is anticipated. So while the U.S. taxpayer is ultimately on the hook for the cost of the bank failures, banks may be less likely to raise their fees and lower their deposit rates due to special FDIC assessments. This would help all banking customers.
Your Deposit Insurance
If the bill is passed into law the specific rules regarding FDIC insurance will remain unchanged. Individuals will be insured up to $250,000 per bank. A husband and wife who hold an account jointly at a bank will be insured up to $500,000. And retirement accounts will be insured separately than individual accounts up to $250,000 per deposit. The rules regarding trust accounts and payable-on-death accounts can be tricky, but the FDIC website provides detailed explanations and an online insurance estimator for consumers to use.
The Future of Bank Insurance
Sheila Bair, the Chairman of the FDIC, has been widely quoted stating that, "No one has ever lost a penny on an insured deposit." The permanent increase in deposit insurance to $250,000 per deposit would amplify the government's willingness to protect (at all costs) that FDIC guarantee. The government and politicians have sent every signal that they are going to protect bank deposits with every resource available. Savers across the country, while still having to strictly adhere to the insurance rules of the FDIC, can count on that FDIC guarantee for years to come.
