Is it time to increase FDIC coverage above $100k?

When the Federal Deposit Insurance Corporation was instituted back in 1933, the $100,000 deposit insurance was a huge sum to the average citizen. In today’s money, that’s worth about $1,600,000. Very few in 1930s had to worry about reached the insured cap. The per capita GDP was about $700 then. It is now about $45,000. So the insured cap has gone from about 140 mean incomes to about 2. It is now quite possible for a reasonable saver to accumulate more than $100,000.

In today’s economy, many people do not feel safe with uninsured deposits. Yes, you can split your nest egg among multiple banks. But that becomes harder as more and more banks go under or are bought out. It seems to me that it’s time for an increase in the insured cap. How high? I’d suggest at least $1M if they included an automatic inflation adjustment, but would be happy up to $10M if there was none.

Are there arguments against raising it?

$1M would be good, but the FDIC and government are broke. They only way to bail people out results in devaluation of the dollar so effectively it is not much insurance.

Even if they did offer $1M FDIC, my money is not staying in the USA. Sure, I keep some there in a few different banks, but the bulk of it is in a safer country.

I’m not that old, and I remeber when the FDIC insurance was only $40,000 per account. Seems it was only ten years ago or so they raised it to $100k.

Ed

This is a question that has been around for many years and seems to have been purposely ignored.

Hindsight is 20/20 but I daresay that if the amount of FDIC insurance had been indexed for inflation we might not be in the mess we are now.

How so?

How people save has changed a lot since the 1930s. Most people with the $100,000 to $1,000,000 level of savings won’t have most of it in savings accounts, but will have a lot in more risky, but higher return, investments, such as stocks or mutual funds – and you would not want the feds insuring that sort of investment.

FYI, in 1934, the limit was $5,000 and it’s increased since then, most recently in 1980 to $100,000.

If that is correct then the limit seems to have moved roughly with inflation. The number of people who keep more than 100,000 in a bank deposit is minuscule so this is certainly not a significant part of the current crisis. Perhaps the limit should be adjusted for inflation every ten years or so but really it is a minor issue.

I heard a pretty convincing argument on the radio this afternoon. It was pointed out that a lot of businesses have to keep a few million dollars in a bank account at any time to cover payroll, vendor checks, etc.

Supposedly what brought down Wachovia at the end was that a lot of these business customers got nervous and wired all of their funds out of Wachovia accounts, draining a lot of liquidity out of the bank.

Basically there was (according to the story) a high-end run on the bank. Raising the FDIC limit to $10,000,000 would arguably make this less likely to happen.

First, what** brazil84** said. Also, it would have forced the banks and the Fed to be much more conservative as the amount in reserve would have had to much greater. Now, people and institutions are moving money around to make sure cash is insured. It’s creating instability in the banking system. While it may be that a lot of individuals don’t have $100,000 on deposit in cash, there are a lot of businesses and organizations that do. For instance, there are many, many co-op and condominium associations that have over $100,000 in cash reserves and many are making moves to insure all of it.

Good points, but how would any of that prevented the mortgage crisis that led to all of this?

IANA expert on the Fed and we are into the hypothetical but it seems to me that it would have limited some of the reckless lending. While we may have still had a financial crisis I think that it would be much smaller. It might be more on the scale of the Savings & Loan crisis, that, while bad, was manageable and didn’t have the world’s great financial institutions heading for the bunkers.

if i remember correctly, the current limit (one hundred thousand per person per bank) was inacted after the s&l meltdown during h. bush’s presidency. i remember because there was a bunch of people moving money around to different banks rather than having a couple of savings, a checking or 2, or money market all in one bank.

at that time one could have multiple accounts in one bank with up to one hundred thousand in each and be insured for each account. the amazing thing was that in my workplace it was the 3 foot couriers that had to find other banks to park their money. these guys were in thier 50s, living with grey haired mums all their life, and rarely bought anything. most especially soap and clothes. it was mindbending.

It is about inconvenience to the wealthy. Now they have to open several accounts ,some at different banks to get covered. They are covered.

I don’t see how this would have eliminated the profit incentive of the reckless lending in question. They did that because it made them a ton of cash, and because they could sell it off later. I don’t see how higher FDIC limits would have diminished that.

I don’t know how to explain my point other than to make the analogy to a gambler in a casino. I you send him in with a certain amount of money and a closed credit line, no matter how stupid he bets he can walk out and still pay the mortgage. If you send him in with no limits then you are asking for disaster.

The Fed is there to hedge the poor bets and they must be able to absorb the potential losses without there being a crisis of confidence. A Fed with greater reserves and more limits on the financial institutions they protect might have saved us a lot of pain. I’m thinking that if the Fed’s risks were greater they might have had more regulations and oversight. Maybe I’m wrong.

I have friends in the financial business and the horror stories that are coming out are almost unbelievable. There were supposedly sound financial institutions that were making 40 to 1 leveraged bets on subprime mortgage derivatives. If their bets went wrong (which of course, they eventually were going to) they just put out another bet at more risk. It’s like taking your nest egg to the track an betting on every longest of the longshots hoping that one will come in.

There are definitely more than a few people involved in this that deserve to be in jail. However, they dress nice and live in nice houses to we can’t do that to them, can we?

The markets are fueled by greed and avarice. That’s not all bad but vices need to be controlled. That’s where government comes in. That’s where government fell short. Now we all pay.

:confused: So you really think they sat there in congress saying “Bwahaha. This bill will make the wealthy have to receive MULTIPLE bank statements! They will need to stand in all kinds of bank lines! It will be great part of our ‘annoy the rich’ policy!” Do you really believe “make rich people’s lives pointlessly inconvenient” is on anyone’s (especially rich congress people’s) agenda?

I think the idea that if one bank collapses there is a limit to how much the FDIC is on the hook for and hopefully the rest of your money is safely tucked away in other banks.

But in your analogy, the bank would be the casino. The casino has no incentive to stop a gambler so long as they are making money. Say those account holders were insured up to $1 million. Why would the bank have not made all these bad loans?

I don’t buy the notion that if people had more protection they would suddenly park all their money at the local bank. Even if they did, that doesn’t stop the bank from loaning to under-qualified people. In fact, it just gives them more money to loan to people.

Exactly. Unless I’m missing some part of this, insuring people wouldn’t have diminished the greed that led to all this at all.

I was under the impression that the insured deposits for each individual is currently $100K and if you have $200K split between two banks, it doesn’t change the fact only $100K is insured.

Obama has suggested $250K as a new limit, and that sounds good to me.

One story on the news was that a bank in California failed and it had a very good rate on a savings account, so as the market underpreformed, many retirees or near retireees took all their savings and put them in deposits in the bank as a simple savings account there was doing better than the market, and now they are out all but $100K.

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The FDIC insures individuals for $100K per insured bank. So multiple accounts at the same bank would have to total less than $100K to be fully insured, but $200K split evenly between two FDIC insured banks would be fully covered.