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Could The FDIC Go Broke?

Posted by Larry Doyle on March 5, 2009 9:45 AM |

In very short order, the FDIC (Federal Deposit Insurance Corporation) has seen its reserves plummet from $50 billion to $18.9 billion at the end of 2008. At that pace and with the expectation of more bank failures, could this bedrock of our national banking system go broke? Well, FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year.  Is Sheila Bair unnecessarily sounding warning signals? Am I running to the bank to withdraw my money? No and no.

Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations.

The FDIC is funded by making assessments on all the banks throughout the country. With those assessments assuredly headed much higher, bank earnings will be dramatically impacted this year. In fact, analysts believe that many banks’ earnings will decline by anywhere from 50% to 100%!! The smaller community banks are enraged by the prospects of higher assessments given that many if not most of these banks managed their businesses with appropriate risk controls.

While taxpayers do not directly fund the FDIC, the fees incurred by member banks will be passed along to consumers in the form of increased charges on every transaction.  If you feel like you are getting “nickeled and dimed” to death it is due to these increased FDIC assessments.

In light of this situation, what is one to do? First and foremost, make sure you do not have any deposits over the FDIC insured deposit limit of $250k at any one institution. The FDIC website has a wealth of information including an online estimator to assist you in calculating your FDIC insurance coverage. Additionally, proactively manage your finances so you can minimize your banking needs. I continue to encourage people to shop around for your banking needs, as well as for insurance and all other financial needs. Credit unions remain a great alternative to many traditional banks.


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