October 1, 2008
Currently, bank deposits are insured by the Federal Deposit Insurance
Corp. up to $100,000, but the agency is asking for temporary authority
to increase that amount to something significantly higher.
FDIC Chairman Sheila Bair says the $100,000 limit that has been in place for over 28 years is not high enough to prevent runs on troubled banks. The fear that not all of a depositors' cash will be covered, she says, is creating unnecessary fear in the marketplace.
A spokesman for Bair said Congress should come up with the new amount of insured deposits.
The issue has moved to the forefront as the credit crises has caused at least 12 banks to fail so far in 2008. Dozens of others are said to be in trouble, because of heavy investments in questionable mortgage securities.
FDIC has seen its pool of cash heavily impacted by the wave of bank failures this year. One the collapse of California's Indymac, caused a particularly heavy drain on FDIC. However FDIC avoided having to pay off depositors last week when JPMorgan Chase swooped in at the last minute to buy the assets of Washington Mutual, just as the bank was being seized by regulators.
In a continuation of that encouraging trend, Citibank this week bought the assets of Wachovia at a low price. FDIC also assisted in that transaction.
FDIC hopes Congress will raise the amount FDIC can insure, thereby heading off a run on banks. The agency estimates the current $100,000 limit covers only 63 percent of today's bank deposits. Congress has already passed legislation that would peg insurance coverage to the inflation rate, but the new law has not yet taken effect.
