Deposit Insurance

This year has been notable for the number of banks that have failed in the U.S. According to the Federal Deposit Insurance Corporation (FDIC), 109 banks have been forced into receivership as of October 23. That is the highest number since 1992, when the nation was in the midst of the savings and loan crisis.

Twenty-five American banks failed in 2008.

Despite the toll of bank collapses, few are likely to lose money because funds on deposit at every bank and savings and loan association in the country are insured by FDIC.

Created at the height of the Great Depression, the independent agency has protected deposits at member banks from loss for 75 years.

A bank customer’s deposits up to $250,000 are safe from loss. As of Jan. 1, 2014 the cap reverts to $100,000.

The Deposit Insurance Fund, from which FDIC covers protected deposits, is capitalized by premiums assessed against banks. The premium each bank pays is based on the amount of insured deposits it holds and the degree of risk the bank’s balance between assets and liabilities poses to the fund.

A bank is placed under FDIC receivership when the amount of its cash reserves becomes insufficient to meet obligations to depositors and creditors. The decision to place a bank in receivership is made by the bank’s chartering authority, which could be a state banking agency, the Comptroller of the Currency or the Office of Thrift Supervision, and the bank remains in that status until a buyer is found.

The government does not announce that it intends to place a bank in receivership. Ordinarily, the bank is re-opened under new ownership within a few days. Customers continue to have access to their funds up to the deposit insurance limit. Once the purchasing bank takes over ownership of the failed institution, and FDIC ceases acting as receiver, the role of deposit insurance ends and the new owner of the bank honors transactions in the usual manner.

In some cases FDIC cannot convince another bank to purchase the assets of a failed bank. In that situation FDIC will reject debit card transactions, return checks written against accounts at the failed bank, and issue checks for the amounts on deposit and final statements to customers.

Customers who have more on deposit than is covered by the insurance limit become creditors of the receivership. FDIC will pay them the amount not covered by deposit insurance as it sells the assets of the institution. On average, those account holders receive about 72 cents for every dollar of uninsured deposits held by the failed bank.

A bank failure also requires FDIC to manage the bank’s assets, usually loans, until a purchaser is found. Generally, the loans considered “performing” (i.e., not in default) are transferred to the purchaser of the institution, which in turn notifies the borrower that it has taken over the loan contract. FDIC may retain troubled assets and attempt to collect any funds due on them from the borrowers.

Borrowers are required to continue making payments toward their obligations, whether the loan asset is retained by FDIC or transferred to the new owner of the bank.

One problem that can develop when a significant number of banks fail is that the cost to the Deposit Insurance Fund may exceed the fund’s cash reserves. That is the situation facing FDIC this year, as the agency has so far paid out about $25 billion in deposit insurance.

FDIC has statutory authority to assess member banks annual premiums in advance in order to avoid insolvency of the fund. It can also assess “special” premiums and borrow up to $30 billion, under ordinary circumstances, from the U.S. Department of the Treasury.

The agency exercised both of those powers earlier this year, imposing an “emergency special assessment” during the second quarter and announcing in September its intention to require member banks to pay premiums for the next three years.

FDIC’s assets are not limited to Deposit Insurance Fund cash reserves. The agency held about $22 billion in cash and U.S. Treasury securities as of June 30, 2009, according to press release issued in August.

As of the end of 2008 the value of the assets in the Deposit Insurance Fund was about 0.4 percent of the total of the deposits insured by FDIC.