Call for FDIC Increase Aimed at Reassuring Bank Customers

It seems miraculous, but on Tuesday when Senator Barack Obama called for an increase in federal deposit insurance deposit levels, no one disagreed with him.  In fact the other major party political candidate Senator John McCain reiterated the need for an increase, even crediting Obama for the idea, as did President Bush.  In the late afternoon Federal Deposit Insurance Corporation (FDIC) chairperson Sheila Bair also called for the increase.

The proposal would raise the level of insurance from $100,000 per depositor to $250,000.  The latter amount is also the level at which the government recently agreed to insure money market accounts following runs on those funds.

The last increase in FDIC insurance limits was 28 years ago when the amount was raised from $40,000 to the current $100,000 to adjust for inflation.  Before that accounts were insured for $15,000.

The increase is proposed mainly as a psychological tool to help alleviate some of the panic sweeping through the American population as people wonder where they can safely park their money, but increasing numbers of deposits in FDIC insured institutions have been exceeding the insurance limits.

It is not hard for an individual with $200,000 or $300,000 to split their savings among two or three banks for safekeeping; however some of the big losers in bank closings have been local governments which need to keep tax revenues and operating funds in demand accounts for day to day access.   Businesses, small and large, have also been affected as payroll moneys have to be drawn from somewhere unless the company chooses to go back to the old cash-in-an-envelope way of paying employees.  Therefore, accounts designated for payroll or for paying suppliers often exceed $100,000 if only temporarily, and multiple operating accounts for even a small business can quickly go over the individual depositor limit unless split among several banks.

Even those with far less money in the bank will probably gain some reassurance from the call for an increase, especially the one from Ms. Bair, as it may indicate that the FDIC bank fund is solvent, even in the face of mounting bank failures.