Four more years: FDIC extends its maximum insurance limit

On Wednesday, the Federal Deposit Insurance Corporation (FDIC) announced that it will keep the $250,000 account cap in place until December 31, 2013. The new limit was originally set to expire on December 31, 2009.

The cap, which was increased from $100,000 in October 2008, represents the maximum amount of money that the government will insure in an individual bank account; should a bank fail, the government promises to replace all funds up to that amount. This is also true of National Credit Union Administration (NCUA)-insured credit union accounts. Bank and credit union-held retirement accounts, such as IRAs, are permanently insured up to $250,000.

Ultimately, the FDIC deposit maximum is more a matter of marketing than money. After all, if the maximum deposit is $100,000, then an individual attempting to protect $1 million in assets need only create ten different accounts, either at the same bank or at several different ones. While the $250,000 limit makes it simpler to protect large sums of money -- a millionaire need only create four different accounts -- it doesn't substantively change the financial environment.

However, $250,000 makes a big psychological difference. Last fall, when it looked like the sky was falling and investors were scurrying to find a safe place to put their money, the move to increase the FDIC's level of protection sent a clear message that the government was in charge, that it would resolve the crisis, and that it would protect its citizens. Beyond this, of course, the higher maximum encourages larger deposits, and thus more capital sitting in banks. This, in turn, helps banks shore up their finances and, presumably, frees up credit.

There is another side to this issue, though. While it is important that investors feel that they have a safe, secure place to put their money, encouraging them to place large deposits in banks for long periods of time effectively takes money away from stocks, bonds and commodities, discouraging investment in other sectors, and this could potentially slow down recovery.

So the FDIC faces something of a balancing act with its insurance thresholds. That's why I think a better move might be to gradually reduce the maximum deposit over the next four years. If, for example, the maximum dropped to $200,000 in 2010, depositors with maxed-out accounts could reevaluate their strategy. As they moved $50,000 out of one account, they might choose to put part of it into another account, part into bonds, and part into the stock market. By encouraging this sort of decision, the government could inspire a regular reconsideration of the market and, perhaps, speed up a return to normalcy.

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