NCPA - National Center for Policy Analysis

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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