Raising Bank Deposit Insurance is Bad Business
June 17, 2002
On June 12, the Federal Deposit Insurance Corporation announced that the reserves of the Bank Insurance Fund -- which protects bank deposits and reimburses depositors of failed banks -- had fallen below the 1.25 percent minimum level (see figure). Despite this, Congress is seeking to expand its liabilities by increasing deposit insurance.
- The $100,000 deposit maximum covered by insurance is sufficient to cover 99 percent of accounts.
- The average amount per account is only about $6,000 -- and the median value is just half that.
- It's possible to have an unlimited number of accounts in different institutions (totaling millions of dollars) all covered by deposit insurance -- seeming evidence there's little need to raise the maximum level of insured deposits.
- Yet the House recently voted overwhelmingly to raise the maximum to $130,000 per account -- something critics say can cost banks, depositors and taxpayers a great deal.
Most banking experts believe the increase in deposit insurance from $40,000 to $100,000 in 1980 contributed to the savings and loan crisis that ultimately cost taxpayers about $150 billion. It encouraged financial institutions to make excessively risky -- and ultimately bad -- loans. Insurance lulled people into a false sense of security and they put their money into such institutions anyway . The new proposal, critics say, is just as flawed.
- First, banks will have to pay higher fees -- about $3.5 billion over the next decade.
- These expenses will be passed on to depositors in the form of higher fees, lower interest on deposits and fewer free services.
- Thus, average people will end up paying so that a tiny number of very wealthy depositors can get an additional $30,000 per account covered by federal insurance.
Since poor depositors will bear most of the burden, the poor will be subsidizing the rich.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, June 17, 2002
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