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DIC insurance: backing is strong but hard assets are good, too

"Moneywise" readers sometimes question the adequacy of insurance offered by the Federal Deposit Insurance Corporation (FDIC) for deposits in commercial and savings banks and the Federal Savings and Loan Insurance Corporation (FSLIC) for deposits in savings-and-loan associations.

Individual accounts are insured by FDIC and FSLIC to $100,000. A couple could, by structuring accounts individually, jointly, and in trust gain coverage for as much as $500,000 in one institution. Or individual accounts in different institutions would each be insured to $100,000.

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Of course, insurance is only as good as the insurer. Obviously, economic conditions here and abroad and the strength of the financial system affect adequacy. So do reserves and the operation of the insuring organizations.

William M. Isaac, a director of FDIC, recently addressed the ability of that organization to protect savers' funds: "At mid-1980 the FDIC insurance fund stood at $10.4 billion. It had grown by more than $1.1 billion over the previous 12 months. In contrast the total losses sustained by the FDIC on all 566 bank failures since the inception of the fund in 1934 amount to only $290 million -- about one fourth of our current annual net income.

"In addition to our own resources, the FDIC has by statute a $3 billion line of credit with the US Treasury. The corporation has never had to draw down this line, and we do not anticipate the need to do so. Nonetheless, this source of funds provides an added bulwark should the need arise.

"Some observers have noted with concern the decline in the deposit insurance fund as a percentage of insured deposits, from 1.38 percent in 1960 to 1.21 percent at year-end 1979 -- a phenomenon due primarily to inflation of bank deposits coupled with increases in the deposit insurance limit."

When a bank fails, the FDIC does not automatically come in and pay off all depositors with cash from its reserve fund. Again quoting Mr. Isaac: "In nearly three-fourths of the failures over the past 15 years, the FDIC has arranged a takeover by another bank. These assumption transactions have subtantially reduced the outlays required of the FDIC and have also had the effect of providing nearly complete protection for all general creditors of the failed institutions. In the 566 failures handled by the FDIC since 1934, 99.8 percent of all depositors -- both insured and uninsured -- have been paid in full.

"Thus, the ratio of the insurance fund to insured deposits is not of overriding concern. The fund as a percentage of total deposits has remained fairly constant over the past 20 years."

The FDIC claims to have adopted strict controls and quick reporting for banks to provide early warning of difficulties, thereby improving chances for heading off failures. Whether these measures and the resources available to the insuring organizations would withstand a general collapse of credit remains untested.

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FSLIC performance has been substantially equivalent to that of the FDIC, even though far fewer insured savings-and-loan associations have failed -- only nine since 1934, according to one report.

More important than the assurance of getting your dollars back in case of a general collapse of credit and the financial structure -- widely proclaimed by doomsayers in a scenario to which I do not subscribe -- would be the purchasing value of the dollars received.The rapidly decreasing value of paper money was immediately apparent to the Germans in the hyperinflation of 1923. Thus, prudent investors concerned about a general collapse might consider diversification into hard assets rather than depen d entirely on insurance by the US government.

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