But The Levee Was Dry

On Friday, four more banks failed. Two of them, unsurprisingly, were in troubled Georgia. We all know that these banks were “FDIC insured”, but how does that insurance actually work… and just who are these FDIC people?

The C in FDIC stands for corporation. Like the Federal Reserve, the FDIC is actually a corporation, but in the FDIC’s case it is government-run. So I guess you could say it’s a little more like GM than the Federal Reserve.

Unfortunately for the FDIC, being controlled by the government has a few disadvantages. In 2008, when the entire banking system looked like it was crumbling, Congress decided that the FDIC would now insure deposits up to $250,000.  The result was that, no doubt, people kept larger deposits in banks – helping banks stay in business.

However, the downside is that the FDIC has to actually pay those larger claims sometimes – when banks do fail – you know, like on Fridays. But if the FDIC has been planning all along to insure deposits up to $100,000 and suddenly they are insuring a much larger amount of money – how can they be expected to make good on all of the claims when so many banks are failing?

The answer of course, is that the FDIC is more or less already out of money as these data from the FDIC show:

Unfortunately the latest data point is from March, but next week the FDIC is slated to release more information. A simultaneous problem is that the amount of money theoretically insured keeps increasing. As a result, the FDIC wants to increase fees that banks are paying for FDIC insurance – the beginnings of quite a vicious cycle.

I think it would be best to view the FDIC at this point like Fannie Mae. Everyone knows that if it were an independent corporation, it would have to declare bankruptcy. However, since it is assumed that the Treasury department will bail it out, it can continue operating normally, until we hear one day in the news that it “needed a bailout to ensure the stability of the financial system.” The what of the financial system?

Kind of ironic though. The purpose of the FDIC is to convince people to keep their money in inherently unstable institutions because  they know their deposits are insured. Of course, no one thought to point out that the unstable institutions are the ones responsible for paying the insurance premiums to the supposedly much more stable insurance company. I guess we’ll see how well that works… “in the long run.”