NCPA - National Center for Policy Analysis

The Faults of Federal Deposit Insurance

March 14, 2002

Depression-weary Americans hailed President Franklin Roosevelt when he signed federal deposit insurance into law just three months into his presidency. Over the years the ceiling on the amount of coverage has risen and in 1980 was increased from $40,000 to $100,000 per account.

Now a plan is afoot to raise the ceiling again to $130,000 -- and to $260,000 for retirement accounts. The argument is that inflation has eroded the value of the current limit.

Although Americans take comfort in the added security of federally insured accounts, the program certainly carries risks to taxpayers that are too often ignored, economists point out.

  • Both President Franklin Roosevelt and his Treasury Secretary initially opposed federal deposit insurance, believing it was a subsidy for poorly managed banks, but relenting to popular pressure after bank failures in the Great Depression, Roosevelt signed the bill establishing the Federal Deposit Insurance Corporation.
  • In the 1980s, confident that the government would stand behind even the shakiest institutions, investors deposited $100,000 in savings-and-loans that offered high interest rates -- which then took the money to make more risky loans.
  • Then came the savings-and-loan mess and American taxpayers were on the hook for hundreds of billions of dollars.

When the federal government closed the Phoenix-based NextBank last month, the Federal Deposit Insurance Corporation had to shell out $525 million to cover accounts containing $100,000 each. It isn't clear how much it will recover from selling bank assets.

But if the government had been insuring $130,000 accounts, the charge to taxpayers would have been even bigger.

Source: David Wessel, "Capital: A Solution in Search of a Problem," Wall Street Journal, March 14, 2002.

 

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