stephen b

FDIC Insurance Fund - It Doesn't Actually Exist

"The insurance premiums aren't really premiums at all, therefore. They're a tax by another name."

A tax enacted at the same time as a deposit guarantee, with the intent that the tax should, in the long run, be approximately enough to pay for the deposit guarantee. In any given year, of course, the money coming in may be more or less than the money going out, just as with an ordinary insurance company. And, just as with an ordinary insurance company, the money must be invested somewhere, preferably someplace that (as Zachary points out) won't fail at just the time you need to make a lot of payouts.

The important differences with an ordinary insurance company are
(a) an ordinary insurance company would also have to earn a profit to pay dividends to its shareholders, which FDIC doesn't have,
(b) an ordinary insurance company's policies are set by its own interest, rather than by (Washington bureaucrats' estimates of) the national interest, and
(c) since FDIC doesn't have a precise bank balance, it is theoretically possible for it to make LOTS of payouts in an emergency, limited only by the total Federal treasury and Congress's willingness to spend it.

You can decide for yourself whether each of these three differences is a good idea :-)

If deposit insurance were done by the private sector, do you think they would be raising premiums right now? Darn right they would, and probably more than the Feds will (since they wouldn't be obligated by "national interest", only by covering their own bottom lines).