USA TODAY International Edition
Flexibility helps FDIC meet its insurance assurances
When Silicon Valley Bank failed earlier this month, the Federal Deposit Insurance Corp. stepped in, taking over the bank to protect its depositors.
But with the collapse marking the second- largest bank failure in U. S. history, some consumers may be wondering how much the FDIC can handle.
“They have a lot of money at their disposal,” said Ross Levine, a professor and the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley’s Haas School of Business.
He noted that the federal agency has the option of borrowing money from other parts of the government, and other avenues to meet its obligations. “I think people should have extraordinary confidence in the FDIC’s ability to meet its promise of insuring all of the insured deposits,” he said.
What is the FDIC?
The FDIC is an independent branch of the government that was created during the Great Depression to restore the public’s confidence in banks.
In addition to insuring deposits, the agency “examines and supervises financial institutions for safety, soundness, and consumer protection; makes large and complex financial institutions resolvable; and manages receiverships,” according to its website.
How big is the FDIC?
The FDIC has about $ 128 billion in its Deposit Insurance Fund, Levine said. In addition to that, the agency can borrow $ 100 billion from the U. S. Treasury at its discretion, and as much as $ 500 billion with approval from the Treasury and the Federal Reserve. The FDIC can also access money from the Federal Home Loan Banks, part of a system sponsored by the government to support mortgage lending and community investment.
The total amount of deposits in U. S. banks is about $ 18 trillion, Levine said, and the insured deposits represent about half that much.
What does the FDIC protect?
The agency’s standard insurance amount is $ 250,000 “per depositor, per insured bank, for each account ownership category,” the FDIC said on its website. No depositor has lost any of their insured money because of a bank failure since FDIC insurance began, the agency said.
Levine noted that a couple with a joint account, for instance, is insured up to $ 500,000, while a trust with four beneficiaries would be insured for $ 1 million. “If you go to a broker and you have $ 20 million like some of the depositors in SVB, the broker will take that $ 20 million and divide it up across many banks, so that the $ 20 million would be insured by the FDIC across different individual accounts in different banks,” he said.
Most Silicon Valley Bank depositors’ funds exceeded the FDIC’s $ 250,000 cap, but the FDIC, Treasury Department and Federal Reserve said earlier this month that they would all be able to access their funds because the bank’s collapse posed a broad threat to the financial system.
Some lawmakers have discussed possibly raising the $ 250,000 insurance cap in recent days.
How much can FDIC handle?
In the case of Silicon Valley Bank, while the FDIC dipped into its Deposit Insurance Fund to quickly have money available to depositors, the agency will use the sale of the bank’s assets to replenish the fund, according to Levine.
The FDIC is typically unlikely to face losses on insured deposits, he said, though he was unable to say whether that would be true in the case of Silicon Valley Bank given that the agency is also insuring uninsured deposits.
While the FDIC may have to borrow money in an “extreme circumstance,” he said, “all of those facilities exist to make sure that depositors have access to their cash. And in particular, they want depositors to know that they’ll have access to the cash.”
That confidence means depositors will not take all their cash out and the system works more smoothly, he added.
Given those various backups, the FDIC has a broad range of options in the event of a bank failure. “I think the FDIC’s ability to satisfy its obligations to insured depositors is simply limited by the U. S. government’s ability to borrow,” Levine said.