FDIC insurance, inspected

Remember the story that FDIC, which insures bank deposits in the US, could go bankrupt?

While it’s highly improbable that the agency, with its explicit support from the US government, would be allowed to go bust, it’s true that it is in pretty serious need of funding. FDIC chairwoman Sheila Bair said in March:

March 4 (Bloomberg) — Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

FDIC, according to Bloomberg, lost $33.5bn in 2008, drained by the circa 25 US bank failures that year. Another 16 or so banks have failed in 2009, putting further pressure on the agency’s actual payouts. At the same time, the agency’s notional insurance burdens have also increased. In October 2008, FDIC increased its insurance limit from $100,000 to $250,000 per depositor per bank — part of a temporary measure intended to reassure nervous customers. The higher limit is due to expire at the end of this year.

Rolfe Winkler at Option ARMageddon points out that that temporary increase has hardly registered on FDIC’s official insurance commitments.

From Q3 2008 to Q4 2008, FDIC’s estimates for insured deposits officially increased from $4,548bn to $4,760bn — barely anything at all despite the 150 per cent increase in the deposit insurance limit. Winkler says that’s because the temporary increases are excluded. We’re not sure if they’ll eventually be accounted for in Q1 of 2009, but if you were to add them into the Q4 2008 figure, you would get something like this:

Option ARMageddon - FDIC's estimate for insured deposits

That takes FDIC’s insured deposits from $4,800bn to roughly $6,200bn. And that figure increases to $6,400bn if you include the debt issued as part of FDIC’s temporary liquidity guarantee programme (TLGP). Here’s Winkler’s take on the whole thing:

What does this have to do with Ponzis? When Bernie Madoff’s scheme collapsed, he owed somewhere north of $50 billion to his investors but had only a tiny fraction left in the bank. FDIC’s potential liabilities as of Q4 were $6.35 trillion. It has but a tiny fraction of that amount-$19 billion-in the Deposit Insurance Fund. Readers might argue that comparing the two is unfair; FDIC has an open line of credit on the U.S. Treasury. So FDIC’s credit is as good as Uncle Sam’s.

But how good is his? Already, the federal government has committed $12.8 trillion to fight this financial fire (a figure that doesn’t include FDIC’s $6 trillion worth of insurance commitments). Then there’s the trillions of unfunded liabilities for private and public pension schemes that Uncle Sam may be forced to absorb. Also there’s Obama’s budget deficits, which will commit us to borrowing trillions more over the next decade. Finally and most importantly, our unfunded liabilities for Medicare and Social Security surpass $50 trillion.

We can recommend the Feather & Black ‘safe mattress‘ for those who are seriously worried about the state of FDIC and US funding.

Related links:
FDIC’s insurance commitments 34% higher than reported – Option ARMageddon
The mattress savings plan? – FT Alphaville
Banking on FDIC insurance?
– FT Alphaville

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