Bankruptcy

$250K FDIC Caps: Nice, but Irrelevant

By Adam Levitin

I haven't seen the rerevised bailout bill yet, but if its major improvement is raising the FDIC insurance cap, to $250,000 that's a huge yawn. Such a move is helpful, but largely irrelevant to the current crisis.

Sure, it's ridiculous that FDIC caps haven't been inflation indexed, but this crisis is not about lack of FDIC insurance. The current cap is $100,000/depositor/institution. But there just aren't that many Americans with more than $100K sitting in their bank accounts. The Federal Reserve's 2004 Survey of Consumer Finances indicates (on p. 14) that of the top 10% of Americans in terms of wealth, the median amount held in accounts that could be FDIC insured was $58,000. Most Americans have nowhere close to $100K sitting around in the bank, much less $250K. And if you're super rich, you don't just park hundreds of thousands of dollars in your savings account--you either spread it out over several institutions or, more likely put it into higher-yielding investments.

So what is the $250K about?

Three things, I think.

First, it helps small (but not very small) businesses. A small business might have payroll of over $100K or might receive payments of over $100K. The small business could spread its deposits out over several institutions, but that's a (small) pain and the small business might get caught with a lot of cash in the bank at the time of a bank failure.

Second, it helps a consumer confidence generally, by showing that the Federal government will offer even greater theoretical backing of banks (even if it has real little impact). There was, apparently, a point this past week when the T-bill rate dipped negative. This makes no sense, because a T-Bill and an FDIC insured deposit are both backed by the full faith and credit of the United States government. Why pay interest to the government to have a T-bill instead of putting your money in an interest-free FDIC-insured checking account or interest-bearing FDIC-insured savings account? The answer could reflect a lack of confidence in FDIC insurance (and the belief that the FDIC's obligation is limited to the funds in the Deposit Insurance Fund).

And third, it helps a handful of consumers--the super-rich who have lots of cash sitting in a single account and can't be bothered to spread it between a bunch of institutions, even though there are services that do this, and folks who are sitting on a lot of liquidity from a house sale or preparing to purchase a house.

Bottom line: small, but really unimportant improvement in banking law. That this is the improvement that is being trumpeted by the two presidential candidates is really sad. It misses the forest for a weed.

Full post as published by Credit Slips on October 01, 2008 (boomark / email).