FDIC in Trouble?

The Wall Street Jounral (WSJ) published an article in this past weekend’s edition that amounts to a footnote when compared to other articles.  In reality, this article should have been placed on the front page, with charts, photos and bold face print.  Under the misleading title of FDIC Bill Dodges a New TARP Fight (see here), Damian Paletta discusses a recent bill introduced by Senator Christopher Dodd of Connecticut.  The Bill seeks to expand the government’s role in the current financial crisis by allowing the, “FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits…”

Wait, What? 

The purpose of the FDIC’s deposit-insurance fund is to guarantee bank deposits for accounts such as, savings, checking and certificate of deposits.  Essentially, the accounts that hold the cash used by people to conduct their daily business, e.g. grocery shopping.  However, only $250,000 of the total account’s balance is insured.  That all sounds gravy, but Senator Dodd’s introduction of a bill to back-stop this fund raises significant questions.  Are my deposits safe? If so, why does $500 billion need to be made available to the FDIC?

That Pesky Issue of Too Big to Fail

Citibank, Bank of America, Wells Fargo, J.P. Morgan Chase and all the other commercial banks are simply, “too big to fail” according to some.  The story goes that these institutions play a key role in the functioning of our financial system, and a failure of any one of them would cause unimaginable havoc in markets.  But what if they did fail? 

In comes Senator Dodd’s bill.  By expanding the deposit insurance fund from $30 billion to $500 billion, the government is taking a major bank failure into consideration.  The probability of this occurring is growing, and Senator Dodd and the Obama administration are taking a proactive step with this bill.  They believe $500 billion is enough to guarantee depositors should a coveted bank fail. 

It comes down to proportions.  The bigger the bank, the larger the amount needed to back-stop deposits.  During the days of IndyMac Bank, $30 billion was sufficient.  Today, it is Citibank and Bank of America, and $500 billion is apparently needed.