Bailout

Who?s going to pay for deposit insurance?

By Felix Salmon

Tim Fernholz has the details on the new FDIC deposit-insurance cap: it looks like the temporary $250,000 limit is not only going to be made permanent, but will also be made retroactive, to cover uninsured depositors in IndyMac. And then there’s this:

The $100,000 cap hadn’t been increased since 1980, and only in 2006 was it indexed to inflation; one compromise in this measure will keep the cap at $250,000 until it would have risen above that level under the inflation index.

I’m not sure what this means, since $100,000 in 1980 dollars is actually slightly more than $250,000 in today’s dollars.

In any case, what we haven’t seen yet is any indication of how the banks are going to reimburse the FDIC for all the money it’s spent to date and will spend in future bailing out depositors. Chances are this process is going to take decades — and giving the banks all that extra time to come up with the money is a substantial back-door bailout in its own right. It’s not like we’re asking them to borrow the money at market rates, give it to the FDIC, and then pay interest to their creditors: the difference between that and what we’re going to end up with constitutes a multi-billion-dollar subsidy from the taxpayer to the banks.

And, of course, if there’s another major crisis in the next couple of decades, the FDIC fund might at this rate never get replenished.

I don’t have a problem with deposit insurance: it helps to ensure a stable banking system, and that’s a good thing. But it doesn’t come free, and I want to see a lot more detail on how it’s going to be paid for. Let’s make sure it’s the banks doing the paying, not the taxpayer.

Full post as published by Macroprudential on June 16, 2010 (boomark / email).