What is Federal Deposit Insurance?

Today we read a letter to the editor of the WSJ which implies that FDIC insurance is a taxpayer-supported program. It’s not. The fund is paid for by assessments on banks and other financial institutions’ deposits. However, the corporation was created by Congress. Here is a brief history of the Deposit Insurance Fund:

On February 8, 2006, the President signed The Federal Deposit Insurance Reform Act of 2005 (the Reform Act) into law. The Reform Act merged the Bank Insurance Fund (BIF) and the Saving Association Insurance Fund (SAIF) into a new fund called the Deposit Insurance Fund (DIF). This change was made effective March 31, 2006.

On July 21, 2010, the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) into law. The Dodd-Frank Act established a minimum designated reserve ratio (DRR) of 1.35 percent of estimated insured deposits, mandates that the FDIC adopt a restoration plan should the fund balance fall below 1.35 percent, and provide dividends to the industry should the fund balance exceed 1.50 percent. This website contains information [for those] who are interested in learning more about the DIF and Assessment Rates.

As you can see, their website, even including the .gov extension, strives to make it look as if it is a taxpayer-funded program. It isn’t…yet. Now, the FDIC might need to get bailed out in the future if financial institutions start losing so much that the DIF runs out of money bailing them out, but those deposit reserve ratios (DRRs) are designed to avoid that.

The $250,000 limitation on the size of the insured deposits helps avoid encouraging banks and depositors to ignore bank safety because they think the govt will bail them out, if necessary. When the limit went from $100,000 to $250,000, we knew something was up.

However, it looks as if little banks are bearing the brunt of this legislation — Too Big To Fail banks got bailed out; the little guys got closed or forced into mergers.

We wanted to know how our credit union was weathering the financial storm. The CEO reassured us, noting that deposits and members were increasing rapidly as people left their banks and moved over to credit unions. Then, he dropped the bomb. Rates for the  National Credit Union Share Insurance Fund (NCUSIF), had gone way up, putting a burden on the members by making interest rates drop to practically zero.


About InvestingforOne

I've been investing in various assets by myself using a discount broker for many years. Over that time, I've developed some theories that others might find useful. Plus, there is more to investing than money. Time, talent, work, friends, family all go into developing a good and satisfactory strategy.
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