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FDIC Bank Deposit Insurance (United States): Some Things you did not Know (and Should)

Posted by commendatori on July 30, 2008


Many people have written to us asking about the safety of banks outside the United States. Obviously, most of these questions have come from Americans who are trying to make a comparison between FDIC, or government bank account insurance, and any similar type of insurance or bank safety programs. While having a government insurance program in place to protect depositors is a wonderful idea, one should be very clear about exactly what kind of coverage exists (and if the government sponsored insurance company is financially solvent or capable of addressing a true banking crisis). We only mention this because, while FDIC allows many people to sleep better at night, as a solvent insurance company, in my opinion FDIC is somewhat of a sham. In the least, it is certainly NOT what most people think it is.
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You are correct if you say, It is better than nothing. However, one should compare apples to apples when looking at foreign banks and how much is kept on reserve to cover failed banking institutions. In many countries, the Central Bank of the country is charged with this responsibility and the reserve requirement is often as high as 5% or more of each bank’s deposits. In other words, which number is greater, 5% or 1.38%? (See the FDIC information below, whereby in reality only 1.38% is in reserve for the entire insured number of banking deposits).
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What about FDIC, with it’s US$ 29 Billion Dollars (1998 figures) in the bank insurance fund? Well, according to FDIC statistics, there are 77 commercial banks with US$ 10 Billion Dollars or more on deposit. This means it only takes 3 out of these 77 very large banks to fail, and the FDIC insurance fund is wiped out once again (See 1991 & 1992 statistics).
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The following information should be very interesting for you, if you have a bank account in the US.
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How many Americans knew that the FDIC Bank Insurance Fund (BIF) was broke in 1991, to the tune of negative US$ 7 Billion Dollars and also broke in 1992 to the tune of US$ 100 Million Dollars? Not only was the bank insurance fund insolvent in these years, it was in debt!
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A quote from 1998 FDIC Report to Congress:
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The BIF (Bank Insurance Fund) has grown steadily from a negative fund balance of $7 billion at year-end 1991 to $29.6 billion at year-end 1998. Here is the Link, so you can read for yourself:
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http://www.fdic.gov/about/strategic/report/98Annual/cond.html
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Also, as of 1998, for each US$ 100 Americans have on deposit with US banks, the FDIC can only cover US$ 1.38 if all US banks (covered by FDIC) go under. Now how comforted are you, knowing your account is covered by FDIC insurance? See the FDIC’s own statistics here:
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http://www.fdic.gov/about/strategic/report/98Annual/122.html
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The following has been taken directly from the FDIC web site (http://www.fdic.gov/). Some changes to FDIC coverage were made in 1992 & 1993 and it would seem most US investors are not even aware of these changes (Is it so ironic that they reduced coverage right after they were broke?):
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How is a single ownership account insured?
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All single ownership accounts established by or for the benefit of, the same person are added together. The total is insured up to a maximum of $100,000, including principal and interest.
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If I have deposits in several different FDIC-insured institutions, will my deposits be added together for insurance purposes?
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If you have deposits at the main office and at one or more branch offices of the same institution, the deposits are added together when calculating deposit insurance coverage.
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Can I increase FDIC insurance coverage by dividing my funds and depositing them into several different accounts?
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No. Federal deposit insurance is not determined on a per-account basis. You cannot increase FDIC insurance by dividing funds owned in the same ownership category among different accounts. The type of account – whether checking, savings, certificate of deposit, or outstanding official check such as a cashier’s check, or other form of deposit – has no bearing on the amount of insurance coverage. Furthermore, the use of Social Security numbers or tax identification numbers does not determine insurance coverage.
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Some other information you probably were not aware of:
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WASHINGTON (CNN) — More than 14,000 people have fired off e-mail messages and letters, most of them angry, in response to a federal proposal to track banking clients’ habits in an attempt to stem illegal money-laundering. Most of the messages expressing concern about banking privacy were sent to the Federal Deposit Insurance Corp. The flood of angry e-mail began in December as a 90-day public comment period opened for the proposal. It closes March 8.
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http://www.cnn.com/US/9901/30/banks.privacy.01/index.html

Article URL: http://www.ascotadvisory.com/Incorporations_Directory/Bank_Insurance_FDIC.html

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One Response to “FDIC Bank Deposit Insurance (United States): Some Things you did not Know (and Should)”

  1. AlexM said

    Your blog is interesting!

    Keep up the good work!

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