Editor’s note:

This post was last updated on March 27, 2023.

What is deposit insurance?

Deposit insurance is the government’s guarantee that an account holder’s money at an insured bank is safe up to a certain amount, currently $250,000 per account. Deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC), a government agency that collects a fee – the insurance premium – from banks. The FDIC is overseen by a five-member board—three nominated by the president and confirmed by the Senate, plus the directors of the Comptroller of the Currency and the Consumer Financial Protection Bureau.

Deposit insurance, created during the Great Depression in 1933, drastically reduced the frequency of bank runs that were once common in the United States, as former Federal Reserve Chair Ben Bernanke explained in his 2022 Nobel Prize speech, disappearing in about 40% of all US banks. 1929 and 1933: “They failed, closed or were absorbed by other banks. This happened because there were massive runs, bank runs, where people lost confidence in the banks and took their money out…the ones that closed couldn’t make loans. , apparently, and those who survived became extremely cautious very reluctant. loans.”

“Soon after [Franklin Delano Roosevelt] After becoming president, he called a bank holiday and all banks had to close, and he promised the American public that they would not open until the government inspected them and was confident that they were in working order. And then Congress passed deposit insurance, guaranteeing small depositors that the government would pay them if their banks failed. And this immediately leads to stability of the banking system. And that, of course, as the banking system came into play, it helped lead to the recovery.”

How much of a separate bank account is covered by insurance?

By law, each bank is insured up to $250,000 for each depositor’s account. Congress temporarily raised the limit from $100,000 to $250,000 in 2008 and made the increase permanent in 2010. For most Americans, deposit insurance is enough to insure all the money in their checking and savings accounts. However, businesses and other large organizations can hold $250,000 at a time. By the end of 2022, about 43% of all bank deposits were uninsured, according to the FDIC.

How is the FDIC financed?

The FDIC receives no appropriations from Congress, although it is supported by the full faith and credit of the US government. Instead, the agency is financed by insurance premiums paid by banks and interest earned on the FDIC’s deposit insurance fund, which is invested in U.S. government obligations. Banks’ premiums depend on the size of the bank and bank regulators’ assessment of the bank’s riskiness.

As of December 31, 2022, the Deposit Insurance Fund had $128.2 billion, or approximately 1.27% of all insured deposits. The FDIC is gradually raising premiums to bring the ratio to the statutory minimum of 1.35% by September 30, 2028. Its goal is to fund up to 2% of insured deposits over the long term “to reach levels sufficient to prevent future crises.”

What does the FDIC do when a bank fails?

When a bank fails, the FDIC basically has two options. The first is to sell the bank to a willing buyer, which may take over part or all of the failed bank’s assets and liabilities. The second is to pay insured deposits and liquidate the assets of failed banks, with uninsured depositors recovering money based on the value of the assets. (To read FDIC Chair Martin Gruenberg’s description of this process, click here.)

When Washington Mutual failed in 2008 and was sold to JPMorgan Chase, uninsured depositors (who accounted for 24% of total deposits) got all their money. But when IndyMac failed, also in 2008, uninsured account holders recovered 50 percent of uninsured deposits. Nevertheless, IndyMac was the costliest failure in FDIC history—a $12.4 billion hit to the deposit insurance fund. Since 1991, the FDIC has been required to choose the least expensive resolution method for its deposit insurance funds—unless the FDIC and other regulators declare that the less expensive option poses a systemic risk (see below).

On March 19, 2023, The FDIC said it was sold Substantially all deposits, branches and certain loans of the failed signature bank are at Flagstar Bank in Hicksville, New York. The FDIC estimated that the failure of the deposit insurance fund would cost about $2.5 billion. and on March 23, The company said It sold all of Silicon Valley Bank’s deposits and loans — but not the bank’s bond and other securities portfolio — to First Citizens Bank & Trust of Raleigh, North Carolina. The FDIC estimated the deal would cost deposit insurance funds about $20 billion.

In times of severe financial stress, the law allows the government to lift the $250,000 ceiling. This is known as a “systematic risk exception”. If federal officials believe that normal procedures “would have a serious adverse effect on economic conditions or financial stability,” a systemic risk exception may be declared by the Treasury Secretary in consultation with the President, provided by at least two-thirds of the members. Approved by two-thirds of the FDIC’s Board of Directors and the Federal Reserve’s Board of Governors. The systemic risk exception was written into law in 1991 but was not used until the 2008 global financial crisis. In March 2023, Treasury Secretary Janet Yellen called for a systemic risk exception to cover all deposits at Silicon Valley Bank and Signature Bank.

Although the Treasury Secretary can invoke a “systematic risk exemption” to allow the FDIC to lift the deposit insurance ceiling for other banks, the Dodd-Frank Act, passed after the global financial crisis, says the FDIC can “substantially increase” the $250,000 limit available only to With Congressional approval. After the failure of Silicon Valley Bank, proposals to raise the ceiling continued to circulate in Congress, the administration and parts of the banking industry. For example, a coalition of medium-sized banks asked regulators to extend insurance to all deposits for the next two years.

Asked at a March 22 congressional hearing, Treasury Secretary Yellen said the Treasury was not considering lifting the $250,000 deposit ceiling for all accounts. “all I’ve said that when a bank failure is judged by the FDIC Board, the Fed Board, and myself in consultation with the President… it’s considered to create systemic risk, which I think of as a contagion risk. Run the bank, that we’re probably systemic risk. can invoke exceptions, which allow the FDIC to protect all depositors. And that will determine the case. I have not considered or discussed anything related to blanket insurance or all deposit guarantees.”

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