How safe is your government-insured bank account?
Monday, May 12th, 2008Maybe not as safe as you imagine. That’s the message from an interesting page appearing here by Dr Chris Martenson :
http://www.marketoracle.co.uk/Article4335.html
Your bank account may not be as safe as you think (or hope). Taking a deeper look at the legal details and the financial depth of the FDIC reveals several troubling details that call into question how the FDIC would fare during a true banking crisis. The US is coming out of a period of unusually low banking stress and failures. Since it is typical human behavior to let one’s guard down during tranquil periods, we might legitimately ask if this has happened with respect to the FDIC.
.
The two most common methods employed by FDIC in cases of insolvency or liquidity are the: Payoff Method , in which insured deposits are paid by the FDIC, which attempts to recover its payments by liquidating the receivership estate of the failed bank or The Purchase and Assumption Method , in which all deposits (liabilities) are assumed by an open bank, which also purchases some or all of the failed bank’s loans (assets).
.
In short, if your bank gets in trouble, the FDIC will ride in and either pay off your account (up to $100k), or sell your bank off to another bank which will then assume the usual duties of your bank. Under normal circumstances, a bank failure should not impact you in the least. But these are not normal times. We might reasonably ask how the FDIC would respond during a major banking crisis. After all, this is our money we’re talking about. Faith and hope are great at weddings and sporting events, but they should not form the basis of our strategy for handling our finances. How many bank failures could the FDIC handle at once?
.
The 1.22% Reserve Ratio means that for EVERY DOLLAR in your bank account, the FDIC has 1.22 CENTS IN RESERVE ready to cover your potential losses. This has proved to be an ample amount during the period of stability we’ve recently had, but it doesn’t seem particularly significant, considering the recent headlines about banking losses (Spring of 2008). Consider, for a moment, the collapse of Bear Stearns. In order to assume that bank, JP Morgan asked for, and received, a special waiver from the Federal Reserve to keep $400 billion of suspect of Bear Stearn’s assets off the books of JPM (page 4 of the linked document). While JPM may have been padding the books a little bit here, due to the uncertainty of how bad the wreckage might turn out to be, $400 billion dwarfs the $52 billion reserves of the FDIC.
.
If one medium-large bank collapse could wipe out the FDIC by a factor of nearly 8, what do you suppose would happen if there were multiple, simultaneous bank failures? At this point, my guess would be that Congress would be sorely tempted to borrow additional funds to remedy the situation, but I worry that hardship and losses might result while the laws were amended and sufficient funding avenues identified. So how many bank failures could the FDIC endure? The data suggests slightly fewer than one big one!
Read more at http://www.marketoracle.co.uk/Article4335.html