Congress has a mandate that the FDIC must hold enough money to cover 1.15% of all deposits insured by the agency.  Yeah, just 1.15%. That means if all our money melted and we went to the FDIC for our deposits back, we’d each get just 1.15%.  That’s actually okay though because it’s probably based on some serious statistical economic models on what is appropriate.  It wouldn’t be Weakonomics if I didn’t point out that models don’t work all the time, but for the most part I am actually okay with 1.15%.  After all, even in this deepest recession since the FDIC’s founding, they’re chugging along.

But for how long?

Congress may have a mandate of 1.15% but let’s look a little closer at the numbers.  We have about $4.5 billion trillion in FDIC insured deposits in this country.  1.15% is $51.75 billion.  So we should assume they have about that much on hand.  Well that wouldn’t make for an interesting post huh?  Thankfully for the sake of entertaining a few hundred of you the FDIC is in much worse shape! (whew, you thought you were going to have to go read a different blog!)  As of June the FDIC only has $10.4 billion on hand.  If you like percents like me that’s 0.23% of $4.5 trillion.  Based on the article the percent is 0.22% which just means we don’t have exactly $4.5 trillion in deposits insured.

Makes you feel good right?  $10.4 billion is no problem to cover the regional banks that are dropping like flies, $100 million here, $20 million there.  But consider that JPMorgan Chase alone has over $1 trillion in deposits at its bank and you see we might have a problem.  (Yes JPMorgan has that much).  If the big banks were to fail (and they are not in danger of FDIC takeover at this time) the insurance fund would be wiped out 100 times over.  So we need to raise some money for the FDIC.  How do we do it?

Well there are some ideas floating around.  The FDIC is considering taking a loan from the very banks its designed to protect.  Aside from being one of the most ironic ideas in the world, it also creates a concern about taking billions of dollars out of the economy.  This is money that could have been lent to me, your, or a business.  Another idea is to increase the fee banks already pay for deposit insurance.  This could hurt some of the weaker banks though, and push them to the point of being taken over by the FDIC.  They do have a $100 billion line fo credit with the Treasury (who doesn’t these days?) which could be used in an emergency, but this will create media buzz about another taxpayer funded bailout.  I would participate in this buzz.  A final option being considered is to have the banks pay their fees early.  However this won’t fix the long-term cash problems with the FDIC and could also hurt the weaker banks.

No good solutions then.  There never are.  Given the choices I’d prefer to have the banks bailout the FDIC with a loan.  The healthy banks can participate and the unhealthy ones won’t have to.  I think the banks owe the government a favor or two these days.  Though it would take billions out of the economy, those billions are just sitting around as it is.  None of us is trustworthy enough to actually get a loan so the FDIC might as well take one out.

The FDIC has run short on money because it’s had to takeover so many banks, and they expect to takeover many many more.  A full list can be found here.  In order to find out how much money was needed for each I suggest you just do a news search for the bank you’re interested in.

The FDIC serves just as an emergency fund might for you or me.  It’s not meant to cover every single possible expense and possibility.  In the worst of times, we might actually go through our entire emergency fund.  The FDIC is dealing with that moment when you’re down to your last $1,000 and you know you’ve got $7,000 worth of expenses coming up.  The situation just sucks.

Photo: zieak

By The Weakonomist

The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics.

categories: banking, government