If you’re one of the quarter-million north, FDIC should be as important to you as the new budget (for tax reasons).
Introduction
FDIC, or Federal Deposit Insurance Corporation, was created by FDR in 1933 in response to thousands of bank failures. History here.
What it does is that it establishes an insurance fund for customer deposits in the banks, so that even if your bank fails, your deposits are safe. Needless to say, its importance proved vital during today’s bank crisis – what do you do otherwise if you are worried about the safety and soundness of your bank?
When A Bank Fails
FDIC monitors and inspects banks regularly. It’s a huge workload: FDIC insures 8 thousand banks and supervised another 5 thousand.
If you care to know, this is what FDIC does when a bank is insolvent. It takes the bank into receivership, and sell the assets to pay down the debtors, depositors first. It operates based on the least cost analysis.
An Example
Look at what happened to First National Bank of Nevada. The failed bank had assets book valued at $3.3 billion and deposits of $2.3 billion. The assets was written down by $2.3 billion in liquidation, resulting in a net worth of $-1.6 billion.
But FDIC insured and assumed the deposits, and took the loss.
Is FDIC Safe?
Facing almost Great Depression 2.0, you have to think about things like this. Here’s some facts:
-FDIC now insures above $4 trillion of deposits, with Deposit Insurance Fund (DIF) balanced at $50 billion.
-All insured institutions has total assets $13 trillion, loans $7 trillion, deposits $7 trillion.
It very much depends on the asset combo and quality of the failed, and the availability of buyers. Suppose it resembles the aggregate balance sheet, loans valued 2 out of 7, other assets 4 out of 6, it will eat out 1 out of 7 deposits. I guess I will call it worst case.
If 5% of banks fail this way (worse happened), it will clean up the DIF.
Though history repeats itself, let’s hope it won’t happen again.
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