Banking
CD Strategies

The Limitations of FDIC Insurance

April 25, 2008 - Since the mortgage meltdown began and its repercussions have spread, deposit insurance has become a hot button issue at the forefront of consumer’s minds once again as a stream of bad financial news continues to come to light.  However to help put things in perspective, it’s important to note that the list of troubled banks and thrifts is lower now than it was during the Savings and Loan Crisis of the late 1980’s and early 1990’s.  A recent tally of troubled institutions approached 75 at the end of 2007 versus an astounding 1,500 institutions at the time of the S & L Crisis.  It is also important to recall that FDIC Insurance covers only those deposits held in checking and savings accounts along with certificates of deposit (or CDs).  Investments such as stocks, bonds, mutual funds and annuities are normally not covered though some of these investments such as T-bills, notes and bonds, when issued by the federal government, may be protected by the full faith and credit of the U.S. Treasury.  

Every FDIC insured bank or credit union must display the official FDIC insured sign at each window or teller’s station.  Be sure to look for the official sign to be certain the insurance applies to the institution in question and if unclear be sure to ask about membership to insure the safety of your deposit.  The basic insurance limit is $100,000 per person per account at a given institution and since 2005 the insurance limit was increased to $250,000 on an Individual Retirement Account (IRA) under The Federal Deposit Insurance Reform Act.   These maximum limits apply uniformly to banks, thrifts and credit unions having FDIC coverage. 

A controversy regarding FDIC insurance arises with the perception that insured institutions receive an unfair, even hazardous, advantage that most industries do not benefit from.  Regardless of the fact that the institutions themselves are required to pay a premium for FDIC insurance, it is indeed the U.S. taxpayer who bears the ultimate burden if financial disaster strikes.  Contrast this with other institutions operating in the financial arena, such as investment firms offering money market mutual funds, which must compete head-to-head with banks for business and are forced to function in an environment without a taxpayer based safety net.  These non-FDIC insured investment firms must exercise prudent risk management principles knowing that if they were to suffer extensive losses, they could potentially be forced out of business as the result of a loss of reputation.  In many situations a non-FDIC insured firm feels compelled to absorb losses incurred by their funds rather than passing them onto their shareholders.  The perception of risk taking is completely re-framed when management knows there is no one to looking to bail them out of what ever corner they back themselves into or catastrophic decision they make. 


Nancy Osborne, ERATE.com Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.

"I am addicted to Bloomberg TV" says Nancy.

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