Series: The Hutchins Center Explains Summary How does deposit insurance work? James Lee and David Wessel Tuesday, March 21, 2023
Facebook Twitter LinkedIn Print SMS Email More Reddit James Lee Research Analyst - The Hutchins Center on Fiscal and Monetary Policy David Wessel Director - The Hutchins Center on Fiscal and Monetary Policy Senior Fellow - Economic Studies Twitter davidmwessel What is deposit insurance? Deposit insurance is the government’s guarantee that an account holder’s money at an insured bank is safe up to a certain amount, currently $250,000 per account. Deposit insurance is provided by the Federal Deposit Insurance Corporation (FDIC) , a government agency that collects fees – insurance premiums – from banks. The FDIC is overseen by a five-member board – three nominated by the President and confirmed by the
Senate, plus the Comptroller of the Currency and the director of the Consumer Financial Protection Bureau. Deposit insurance, created during the Great Depression in 1933, has sharply reduced the frequency of bank runs that once were common in the U.S. As former Federal Reserve Chair Ben Bernanke explained in his 2022 Nobel Prize speech , about 40% of all U.S. banks disappeared between 1929 and 1933: “They failed, closed, or were absorbed by other banks. That happened because there were massive runs, bank runs, where people lost confidence in the banks and pulled out their money…The ones that were closed couldn’t make loans, obviously, and the ones that survived became extremely cautious being very reluctant to make loans.” “Shortly after [Franklin Delano Roosevelt] became president, he called a bank holiday and all the banks had to shut down, and he promised the
American public that they wouldn’t open up until the government had inspected them and was confident that they were in viable condition. And then the
Congress passed deposit insurance, so that small depositors would be guaranteed that even if their bank failed, the government would pay them off. And that led instantaneously to a stabilization of the banking system. And that, of course, as the banking system became workable, that led to, helped lead to recovery.” How much of an individual bank account is covered by insurance? By law, up to $250,000 is insured for each depositor’s account in each bank. Congress raised the limit from $100,000 to $250,000 temporarily in 2008 and made the increase permanent in 2010. For most Americans, deposit insurance is more than enough to insure all money in their checking and savings accounts. However, businesses and other large organizations may hold over $250,000 at a given time. As of the end of 2022, about 43% of all bank deposits were uninsured , according to the FDIC. How is the FDIC funded? The FDIC receives no appropriation from Congress , although it is backed by the full faith and credit of the U.S. government. Instead, the agency is funded by insurance premiums paid by banks and from interest earned on the FDIC’s Deposit Insurance Fund, which is invested in U.S. government obligations. The banks’ premiums depend on the size of the bank and bank regulators’ assessment of the riskiness of the bank. As of Dec. 31, 2022, the Deposit Insurance Fund had $128.2 billion, or about 1.27% of all insured deposits. The FDIC is gradually increasing premiums to bring the ratio up to the statutory minimum of 1.35% by September 30, 2028. Its target is to get the Fund up to 2% of insured deposits over the long run to “ reach a level sufficient to withstand a future crisis .” What does the FDIC do when a bank fails? When a bank fails, the FDIC basically has two options. The first is to sell the bank to a willing buyer, which may take a portion or the entirety of the failed bank’s assets and liabilities. The second is to pay off the insured deposits and liquidate the failed bank’s assets, with uninsured depositors recuperating money based on the value of the assets. (To read FDIC Chair Martin Gruenberg’s description of this process, click here .) When
Washington Mutual failed in 2008 and was sold to JPMorgan Chase, uninsured depositors (who accounted for 24% of total deposits) got all their money. But when IndyMac failed, also in 2008, uninsured account holders recovered 50 percent of uninsured deposits . Even so, IndyMac was the costliest failure in the FDIC’s history – a $12.4 billion hit to the Deposit Insurance Fund. Since 1991, the FDIC has been required to choose the resolution method least costly to its Deposit Insurance Fund — unless the FDIC and other regulators declare that the least-cost option poses a systemic risk (see below). Why did depositors in Silicon Valley Bank and Signature Bank with more than $250,000 in their accounts get covered? At times of acute financial stress, the law allows the government to lift the $250,000 ceiling. This is known as a “systemic risk exception.” If federal officials believe that normal procedures would have “serious adverse effects on economic conditions or financial stability,” a systemic risk exception can be declared by the Treasury Secretary, in consultation with the President, provided at least two-thirds of the members of the FDIC’s Board of Directors and two-thirds of the members of the Federal Reserve’s Board of Governors approve. The systemic risk exception was written into law in 1991 but wasn’t used until the Global Financial Crisis of 2008. In March 2013, Treasury Secretary Janet Yellen invoked the systemic risk exception to cover all deposits of Silicon Valley Bank and Signature Bank. What about depositors at other banks with more than $250,000? Although the Treasury Secretary could invoke a “systemic risk exemption” to allow the FDIC to lift the deposit insurance ceiling for another bank, the Dodd-Frank law passed after the Global Financial Crisis says the FDIC can make an increase in the $250,000 limit “widely available” only with the approval of Congress. Following the Silicon Valley Bank failure, proposals to raise the ceiling began circulating in Congress , in the administration , and in some parts of the banking industry. A coalition of mid-sized banks , for instance, has asked regulators to extend insurance to all deposits for the next two years. The Brookings Institution is financed through the support of a diverse array of foundations, corporations, governments, individuals, as well as an endowment. A list of donors can be found in our annual reports published online here . The findings, interpretations, and conclusions in this report are solely those of its author(s) and are not influenced by any donation. Related Content Financial Regulation Focus on bank supervision, not just bank regulation Peter Conti-Brown and Sean Vanatta Tuesday, November 2, 2021 Financial Regulation Who should regulate: Chairs or majorities of the board Aaron Klein Thursday, January 6, 2022 Op-Ed SVB’s collapse exposes the Fed’s massive failure to see the bank’s warning signs Aaron Klein Thursday, March 16, 2023 Related Topics Financial Regulation U.S.
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