The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, permanently increases the deposit insurance limit to a maximum of $250,000.
Deposit insurance limits had previously been temporarily increased from $100,000 to $250,000 effective from October 3, 2008, through December 31, 2010. The higher insurance coverage applies per depositor, per insured institution for each account ownership category.
In addition to raising the deposit insurance limit, the Act makes the increase retroactive for all banks that failed between January 1 and October 3, 2008. Accordingly, the $250,000 deposit insurance limit will apply for depositors of failed banks for the period specified.
According to the FDIC, the increased deposit insurance limits will apply retroactively to the following failed banks:
- Hume Bank, Hume, MO
- ANB Financial, N.A., Bentonville, AR
- IndyMac Bank, F.S.B., Pasadena, CA
- First Priority Bank, Bradenton, FL
- The Columbian Bank and Trust Company, Topeka, KS
- Silver State Bank, Henderson, NV
The FDIC estimates that the “retroactive increase has reduced the number of uninsured depositors at these failed institutions from more than 10,000 to approximately 500”. Checks will be mailed out on July 22, 2010 to reimburse depositors who had uninsured funds at these institutions. The cost of reimbursing uninsured depositors at these failed banks has previously been estimated to exceed $250 million.
As previously commented on in Problem Bank List, the new Act reimburses depositors who were facing substantial losses when many banking institutions suddenly collapsed during the financial crisis of 2008.
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 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.