'Temporary' Deposit Insurance Will Be Extended to 2013

by: Rolfe Winkler, CFA

Congress approved FDIC’s higher borrowing limits Wednesday. The new law permanently increases FDIC’s line of credit at Treasury from $30 billion to $100 billion. And through 2010, FDIC will be able to borrow up to $400 billion more if the Fed and Treasury sign-off.

The legislation also extends, from 2009 to 2103, so-called “temporary” deposit insurance (unlimited for transaction accounts and up to $250,000 for individual accounts). OA wonders if FDIC will continue the fiction that these new insurance limits are indeed “temporary.” Semantics matter in this instance. As OA reported two months ago, the true amount of deposits insured by the Deposit Insurance Fund is significantly higher ($6.4 trillion) than the official number released by FDIC ($4.8 trillion). FDIC is hiding behind the “temporary” moniker in order to release a lower official figure. No doubt they feel the higher figure would reduce “confidence” in the banking system.

What’s so very frustrating about this whole arrangement is the obnoxious taxpayer subsidy it affords the commercial banking sector. FDIC insurance is a spectacularly effective marketing gimmick for obvious reasons. Don’t trust the stock or bond markets? Just throw your savings in an FDIC-insured bank account where the principal is “guaranteed.” Banks pay nothing for this insurance. Literally. And Sheila Bair isn’t making them pay for it. Her plan to raise $15 billion for the DIF through a one-time bank assessment was never going to happen. It was an organizing tactic:

FDIC Chairman Sheila Bair pushed for months for the enhanced borrowing authority, which had been capped for years at $30 billion. Her requests received little attention on Capitol Hill until she unveiled a plan in February to assess more than 8,000 banks with a one-time fee to bulk up the deposit-insurance fund. Community bankers immediately lobbied Congress to boost the FDIC’s borrowing authority so they wouldn’t be hit so hard.

Now that FDIC has a higher credit line, we’re supposed to believe that everything is copacetic. The DIF can’t go bankrupt because it can borrow whatever it needs from Treasury. But how much comfort is that when the Treasury is running spectacular deficits already?