Is the FDIC In Trouble?

The Federal Deposit Insurance Corporation is a member bank funded insurer that covers cash deposits up to $250,000.

There has been talk recently that if the fund has become depleted and is in danger.  So the questions become: Are deposits at risk? And how will the FDIC rebuild its depleted reserves?

The second question is easy.  The FDIC has already increased fees to bring up their reserves.  But this action is not likely to make a huge impact in the short term.  So the first question becomes center stage – are deposits at risk?

With more than two dozen banks having failed already this year, the FDIC will run out of funds if the situation does not stabilize.  It is no question they are facing a threat, but the likelihood they will fail, and depositors will not receive their deposits up to the prescribed amount, is extremely remote.  So the short answer is no, deposits are not at risk.  The FDIC has a $30 billion credit line and the government has said that they will back the FDIC if it gets into trouble.

The FDIC is essentially backed by the government.  This means the government can provide indefinite funding to keep the organization afloat.  Since the government theoretically can print as much currency as needed, the government would not let the FDIC fail.  A FDIC failure would likely result in a run on the banks, further bank failures and a crippled US economy.  The government would not allow this to happen – not through a FDIC failure.

But while the dollar amount of deposits seem to be safe, for it will be covered by the government backed FDIC, the cost of funding and all the other bailouts which the government is printing more currency for does not come without its own price tag.   The more currency that is printed and in circulation then theoretically the higher chance there is for inflation to creep in and a weakening of the currency.

So far, despite mass spending, the USD has done well against other currencies such as the EUR and GBP.  This is likely due to the fact that this bailout problem is not country specific, but rather global in scope and thus other countries are also being forced to save some of their business.  The USD currently appears to investors as the lesser of evils and somewhat of a safe haven.

While generally headlines have been grim it would seem that deposits are safe, and during these time savings rates are also at their highest levels since 1995.

The Dow Index also rallied sharply on Tuesday, finishing higher by more than 350 points or 5.5%. Positive comments from Citigroup may have played a part in the rally.

~Cory Mitchell

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