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Must read about FDIC insurance

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November 11, 2008 – Comments (4)

I think it was utterly wrong to increase the FDIC insurance.  I completely disagree with a 100% insurance with no deductible to the insured.  That first 100k should have a 5% deductable.  I think it is a good idea to have increased it, but not with the idea of zero risk to depositors.  Banks have behaved irresponsibly and depositors have gone after high yields without concern for consequences.

Badly behaving banks should lose their depositors because depositors have the incentive of trying to protect that 5%.

I am all for increasing the guaranteed amount, but the deductible on the second100K should be 10%.

Safehaven has what I think is a very common sense and fully logical post on the dire straights of the FDIC insurance right now.

The more I think this through the more I think the media bite about the bailout package is to get banks to loan again is absolute rubbish.  I think the banks are in such dire straights it is to prevent mass bank failures based on the existing bad loans.  I think it is so that when you go to your bank to get some of your money out you actually can.

4 Comments – Post Your Own

#1) On November 11, 2008 at 8:21 PM, dwot (40.10) wrote:

I'd do another post, but I've just done two, so a comment instead...

The rising US dollar is killing tourism, or at least that's my take.  CR has a post about how much hotel bookings have just dropped off.

Certainly if I had plans to vacation in the US with the rise in the cost due to the exchange rate I would postpone the vacation this year, and until such time as I thought fair value.  At par I was thinking about vacationing in the US, but right now so many other places have become far more attractive.

Strong US dollar means that tourism has little chance to help the US.

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#2) On November 11, 2008 at 8:32 PM, dwot (40.10) wrote:

Hmmm, I think this one goes to supporting my statement above...

This is from yesterday, but utterly shocking the degree to which Fannie has losses.

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#3) On November 12, 2008 at 10:03 PM, edbbear (< 20) wrote:

It's kind of strange I found the following when I tried to find out if the FDIC is backed by the full faith and credit of the U.S. government:

http://www.fdic.gov/regulations/laws/rules/4000-2660.html

After being shocked at the vagaries of that statement, I found this link on the FDIC web site:

http://www.fdic.gov/deposit/Deposits/insured/basics.html

 Anyway, it certainly appears the FDIC is backed by the Federal Government.  If it is, they have no choice but to pay it--FDIC insurance is as safe as treasuries.  I think that article on Safehaven is 100% wrong when it suggests that with falling tax receipts the government might not follow through on their binding guarantee.  They are legally obligated to, and could do so by printing more money, which they always do anyway when a problem arises. 

On the topic of premiums to depositors, I think that defeats the entire purpose of the FDIC.  The point of FDIC insurance is to give depositors faith in the banking system.  That is why it is heavily regulated.  You cannot expect individuals to read up on the financials to determine if their deposit bank is likely to fail.  They would rather keep their money under the mattress (which I have felt like doing anyway).  I just put money in a Goldman Sachs CD, and I never would have done that if I would lose 1 cent if they folded.  The whole point of the FDIC is that the government is overseeing these banks for you, and even though you can't rely on that, you can still rely on the full faith and credit of the U.S. Government. 

Wow, sorry that took so long.  :)

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#4) On November 12, 2008 at 11:33 PM, MadRussianHobbit (95.15) wrote:

If FDIC insurance premiums were paid by the depositors, I might go along with your proposal.  But they're not.  Premiums are paid by the bank.  (Think of FDIC as similar in concept to unemployement insurance.)  So the argument could go that the bank has to pay some of the missing money.  But they do.  No bank manages to lose all their depositor's money.  They just lose some.  And the insurer (the FDIC) pays the difference.

A bigger problem with the FDIC is that the premiums aren't risk based.  If a bank plays fast and loose (within regs), or if the bank goes out of the way to avoid loosing depositor money, the premium is the same.  Without risk based premiums, there's one less reason to watch risk.

By the way, there's a way around the 2nd $100K is only 90% covered proposal, open multiple accounts.  This used to be mandatory for HUD projects.  According to (older) audit guidance for HUD projects, the rentor's security deposit accounts had to be guarenteed by FDIC insurance.  While a small HUD project wouldn't have a problem, if you were talking about a metropolitan area's Housing Authority, the security deposits would be well over $100K.  (And as an auditor, the rule wasn't to be checked only at year end, we had to look at bank statements to see if it EVER got over $100K.)  To be safe, HUD projects would open another account at a second bank when the security deposit account approached $80K or $90K.  Inefficient as hell.  But doable.  And if FDIC insurance had a deducible on the second $100K, depositors could easily do the same.

Enjoy the roller coaster,

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