Are FDIC Bank Accounts Really Safe

The FDIC is considered to be the bastion of safety that protects American deposit account holders from the risks associated with their financial institutions collapsing due to their own operations. With $250,000 worth of deposits being insured for each account, and $25 billion in funds on hand ready to bail out depositors directly (not the bankers this time, but the depositors themselves), savers have been assured that their money is safe, even in the event of a financial catastrophe. However, there’s a strong argument to be made to the contrary, which means that personal savers might want to take a minute to dig into the details of what’s really going on here, and what a complete liquidation of the retail banking sector would actually entail.

As it stands today, there are approximately $9.3 billion in deposits held by financial institutions in the United States. Assuming these deposits were all insured, the fund itself is already short by $9.25 billion in funds, meaning that they would be unable to bail out American depositors in the US if they all required it at once. In fact, they would only really be positioned to bail out 0.2% of the deposits required in the event of a systemic banking failure.

Interestingly enough, this systemic failure was exactly what was described in 2009. Because of the way in which the financial positions of the various financial instructions have become so intertwined, it actually a very plausible conclusion to make that the failure of a single major financial institution would actually cascade into the collapse of multiple financial institutions at once (as was the case in 2009), resulting in the need for the majority of the FDIC’s funds. The end result is that the FDIC, as it stands today, might very well only be suited to protect against minor financial setbacks, rather than the rather large shocks that tend to be occurring in today’s market.

The next step to take in evaluating the ability of the FDIC to cover out deposit accounts is to look at its ability to obtain leverage on its own terms (ie. the terms of the federal government) to bail out depositors in the event of a collapse. This would mean that the FDIC would essentially become a bank on its own, and would borrow money from outside parties (perhaps through the sale of bonds, from the government directly, or even from international investors), using its existing balance sheet as a fundamental asset sheet, and would then use the proceeds of these funds to pay out deposit account holders going forward.

The likely next step would then be to pass the costs of the bail-out loans onto the other remaining financial institutions, and to pay off the debts over time as a means of maintaining the integrity of the deposit accounts in question. However, even if the FDIC were able to obtain extremely favorable borrowing terms, it would actually require a lender to forward 3000x the fundamental value of its own account to settle out the loan accounts. Given that banks themselves are frowned upon when they operate beyond 30x leverage, it stands to reason that the FDIC would be stuck raising only anywhere between $75B-$1,500B, leaving capable of covering 16% of its deposits outstanding, and again, falling short.

While this sort of analysis is done with very broad strokes, and therefore only provides an illustration of how to put FDIC protection into perspective for a personal saver, there are a few key points to take away from it. Specifically, because of the way in which the FDIC is arguably not capable of bailing out a systemic financial failure, it suggests that the traditional strategies recommended by financial planners might not be enough to protect a saver from a major financial event. Actions such as spreading out money into a variety of different account types and across multiple institutions might not be effective in the event of a shortfall. So with all of this in mind, how is it that we can make sure that even our insured deposit accounts are covered?

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