How Secure Is the FDIC Deposit Insurance Fund?

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How Secure Is the FDIC Deposit Insurance Fund?
by Rob Williams, Director of Income Planning, Schwab Center for Financial Research
Updated September 16, 2009

Key points

We believe that the Federal Deposit Insurance Corporation (FDIC) and its Deposit Insurance Fund are well-positioned to support bank deposits and FDIC-insured certificates of deposit (CDs), despite continued news about increasing bank failures.
The Insurance Fund is backed by a $500 billion line of credit through 2010, increased and extended by Congress from $30 billion this past May.
For more, see additional guidelines on making sure your cash investments have FDIC protection in the sidebar at right.

Since the beginning of the credit crisis last year, the number of failed and "problem" banks has increased to more than 400 with nearly $300 billion in assets, according to FDIC data reported August 27 by FDIC Chairman Sheila Bair. A total of 92 banks have been taken over so far this year, up from 25 in 2008, and the most since the savings and loan (S&L) crisis in the early 1990s.

If you have checking or savings accounts or own insured CDs from an FDIC-insured bank, should you be concerned about your accounts' safety?

We think the FDIC has plenty of protection, including the unlimited support of the federal government. This includes the extension of a line of credit to the US Treasury to $500 billion through 2010 that was approved by Congress in May.

Given the latest news on rising bank failures, we'll answer additional questions below.

What's the purpose of the FDIC?
Established by the Glass-Steagall Act during the Great Depression in 1933, the FDIC is an independent agency of the federal government. The FDIC protects bank depositors against loss of their deposits, including checking and savings deposits and insured bank CDs, up to certain limits.

When an insured bank fails, it's put into FDIC receivership. A failed bank's assets may be purchased and taken over by another bank, but the FDIC often shares in any losses, with the cost born by the FDIC's Deposit Insurance Fund. The FDIC has also made adjustments recently to its policies, allowing it to benefit if a failed bank's assets prove to be profitable to a new bank or investor. This would help replenish the insurance fund, as well.

The Deposit Insurance Fund is also used to repay bank customers for deposits, if necessary, up to $250,000¹ currently, as well as insured CD investments. For more information on how to make sure your funds are protected, refer to the more-detailed article in the right-hand sidebar.

It's important to note that the FDIC only insures deposits, including insured CDs, but not mutual funds or other types of investments sold or managed by banking institutions or their broker subsidiaries.

How is the FDIC Deposit Insurance Fund funded?
The FDIC assesses fees and premiums on all FDIC-insured banks to support the Deposit Insurance Fund. The FDIC's board of directors sets these fees to make sure the available reserves are sufficient to pay depositors in the event that banks fail.

The FDIC receives no appropriations, or payments, from the federal government, and it's not able to issue Treasury bonds or "print" money like the US Treasury.

The amount in the fund is always only a small portion of all of the insured assets held in FDIC-insured banks.

Today, the FDIC has a reserve-funding-ratio target between 1.15% and 1.5% of insured deposits, and generally increases fees, or pays back banks, if reserves move outside this range.

How financially stable is the FDIC Deposit Insurance Fund?
As of September 11, 92 community banks have failed in 2009, compared to 25 (at a cost of $33.5 billion) in 2008. The FDIC has doubled the projected cost of bank closings to $65 billion through 2013.

Due to rising bank-closure costs, on May 22, the FDIC board approved an increase in the assessment against US banks to help restore reserve balances. The FDIC generally seeks to fund its insurance reserves through bank fees, not government funds.

Without these fees, Bair reported that the existing fund might not be sufficient to manage projected costs. The fund is at its lowest level since 1993, during the S&L crisis. As of the end of June 2009, the FDIC Deposit Insurance Fund reportedly had $10.4 billion in available funds, down from $13 billion at the end of first-quarter 2009 and $45 billion in June 2008.

Fees or not, Congress has said (in legislation signed by President Reagan in 1987) that the FDIC Deposit Insurance Fund will be backed by the full faith and credit of the federal government, though historically, it has not relied on taxpayer money.

The exact statements are worth noting, presented here directly from the 1987 legislation: "Since the 1930s, the American people have relied upon federal deposit insurance to ensure the safety and security of their funds in federally insured depository institutions; and the safety of such funds is an essential element of the American financial system.

"In view of these findings ... it is the sense of the Congress that it should reaffirm that deposits up to the statutorily prescribed amount in federally insured depository institutions are backed by the full faith and credit of the United States."

How could the FDIC get government support?
Since the 1980s, the FDIC has had access to a $30 billion credit line from the US Treasury. On May 6, Congress approved a permanent increase to $100 billion, and an additional temporary increase to as much as $500 billion through 2010.

Bair has said she does not anticipate needing this federal support today, including the increased $500 billion credit line, and would likely increase fees again on banks first to help replenish the fund if required.

How do I make sure my cash investments have FDIC protection?
For a handy tool that helps you make sure you're maximizing your FDIC protection, see the FDIC Electronic Deposit Insurance Estimator (EDE).

For more details on coverage limits and rules, you can also refer to the article in the sidebar at right. It will help you take advantage of the maximum protections, as well as provide details on what happens when banks fail.

If you have additional questions, you can speak to your Schwab Financial Consultant or a Fixed Income Specialist at 800-626-4600.

Important Disclosures

1. The temporary increase of FDIC insurance coverage to $250,000 for all insurable capacities has been extended through December 31, 2013. If not further extended, FDIC coverage will revert to $100,000 on January 1, 2014 for all insurable capacities except IRAs and certain other self-directed retirement accounts and plans. Unless the increased coverage is extended, deposit insurance coverage for CDs with a maturity date after December 31, 2013 will revert to the prior FDIC coverage on January 1, 2014, regardless of when you purchased the CD. You should not rely on a possible extension of this increased coverage in purchasing CDs.

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized advice. The strategies mentioned here may not be suitable for everyone. Each investor needs to review their portfolio strategy carefully for his or her own particular situation before making any decisions.

There may be costs associated with early redemption and possible market value adjustment.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Please be sure to research this information further before making any decisions as the rules and restrictions described are subject to change in reaction to shifting market conditions.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc. Brokerage products offered by Charles Schwab & Co., Inc., are not FDIC insured, are not deposits or guaranteed obligations of a bank, and are subject to investment risk.

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Additional Resources

How to Make Sure Your Cash Investments Have FDIC Protection