FDIC Deposit Insurance Limits To Permanently Increase – Savers Finally Win One

June 17, 2010 – Lawmakers have agreed to make permanent the temporary increase on depositor insurance by the FDIC.   To avoid depositor panic during the height of the financial crisis in the fall of 2008, the government temporarily increased deposit insurance limit from $100,000 to $250,000.   The increased deposit insurance was due to expire on December 31, 2013

The US Senate also moved to retroactively apply the increased deposit insurance limits to January 1, 2008 in order to reimburse depositors who had lost money due to the unexpected collapse of many banks.   Although some legislators have described this action as another “bailout”, the fact of the matter is that even sophisticated depositors can be unaware that their banking institution may be on the verge of collapse.   If the numerous regulatory agencies that oversee banks allow unsound loans and practices that lead to a banking collapse, depositors should not be penalized, as has happen on many occasions since the banking crisis began.

The FDIC deposit limits had been raised to prevent possible customer panics and runs on weak banks after an estimated 6,500 depositors lost some of their savings on the sudden collapse of giant Indy Mac Bank in July 2008.  Even after the deposit insurance limits were raised, depositors continued to lose money in cases where the FDIC could not find a buyer for a failed bank.

When the FDIC cannot find a buyer for a failed bank, the FDIC will either do a payout of deposits or establish a Deposit Insurance National Bank (DINB) to wind down the failed bank.   In these cases, depositors who have funds in excess of the insurance limits face potential losses (see Bank Depositors Lose Millions).   An estimated 2,200 depositors (in addition to the 6,500 at Indy Mac ) faced losses due to having uninsured deposits at failed banks.   The cost to the FDIC of reimbursing depositors who had exceeded deposits limits is estimated at up to $250 million.

The FDIC increase on deposit insurance is long overdue given the turmoil in the banking industry.  In addition, the old limit of $100,000 had not been increased since 1980.  Smaller community banks had lobbied aggressively for increased deposits limits since many customers were reluctant to keep large amounts at smaller banks.

Deposit protection in excess of FDIC limits was always possible for depositors but required opening multiple accounts or using multiple banks (see Are My Savings Fully Insured By The FDIC?).   With the long overdue increase in depositor insurance, customers will have more protection with less worry and effort.  Savers, who have suffered from near zero interest rates on their deposits  while also having to worry about the safety of their money, have finally won a small victory.