How secure is the FDIC?

Recent bank failures have required the Federal Deposit Insurance Corporation to make payments to depositors. The FDIC is called in when a bank fails and can't give depositors the cash in their bank accounts. A lot of focus has been on the limits of FDIC insurance, so that depositors are protected. But there hasn't seemed to be as much focus on the actual ability of the FDIC to pay claims. has a nice article about the FDIC and how it works. The agency is funded with insurance premiums paid by banks for the coverage on their deposits. Can the FDIC run out of money to pay depositors? Yes, the agency could be giving out more than it's bringing in from insurance premiums. But if that happens, the FDIC can borrow money which would be paid back via future collections of insurance premiums paid by banks.

Funds at the FDIC are currently lower than legally allowed. The law requires it to have $1.15 on hand for every $100 of insured deposits sitting in banks. Currently, it has only $1.01 for every $100 of insured deposits. How will this difference be made up? The agency is trying to raise insurance premiums for 2009, so that increase along with a hope that other banks don't fail (further depleting cash reserves) will help the FDIC bring its cash balance back up.
In my opinion, though, one other thing may cut into that reserve ratio. Consumers have become more conscious of the FDIC insurance limits available to them, and they may be more careful to ensure that their deposits are covered. So the total insured deposits could go up as a result of consumers shuffling money to make previously uninsured deposits now be insured.

The FDIC doesn't want consumers to worry, however. The economic outlook in the banking industry is not nearly as bad as it was during the savings and loan crisis of 20 years ago. Only about 2% of banks are on the FDIC's watch list right now. Back in the 1980's, there were 12% on the list. the agency has $45 billion on hand right now, and it's confident that's plenty to make it through this difficult time.

I'm not worrying about the status of our banks. I think cash in banks is secure for now, and there are bigger concerns for consumers, such as the value of their retirement accounts. Consider your cash safe, and worry about the other stuff, like how to bring in a bit more income and reduce your expenses during these uncertain times.

Tracy L. Coenen, CPA, MBA, CFE performs fraud examinations and financial investigations for her company Sequence Inc. Forensic Accounting, and is the author of Essentials of Corporate Fraud.
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