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More deposits insured, but for how long?

Consumers may sleep a little better knowing they'll soon be able to stash a lot more money in a bank and have the deposits' safety guaranteed by the federal government, thanks to the bill just passed by Congress. The guarantee begins Jan. 1, 2009, and expires Dec. 31, 2009. A lot can happen by then, but until Congress decides otherwise, consumers should be prepared for this safety net to go away.

When a money market mutual fund "broke the buck" last month, investors started yanking their money out of other funds. In an effort to stop the run, the Treasury Department said any money in money market funds would be guaranteed as long as the fund paid a fee for the service.

Bankers, especially from smaller institutions, howled that it was unfair. The guarantee could cause customers, unsure of their own bank's financial wherewithal, to withdraw their deposits and put them in money market mutual funds. The Treasury then capped the amount covered to money that was in the funds by Sept. 19.

Reducing risks for banks

The Emergency Economic Stabilization bill sought to alleviate the risk of customers ditching their banks by increasing the amount of FDIC deposit insurance on accounts from $100,000 to $250,000. This is good news for consumers and small business owners because the $100,000 limit, in effect since 1980, hardly kept up with inflation. The Bureau of Labor Statistics inflation calculator shows that $100,000 in 1980 dollars equals $265,881 today.

The new provision has no effect on IRAs, which already have $250,000 in FDIC coverage. But you can now put up to $250,000 in an individual account in an FDIC-insured or NCUA-insured institution and be assured that if the bank or credit union fails, you'll get every dime back plus accrued interest. Deposit products -- checking, savings, money market accounts and certificates of deposit are covered under FDIC rules. Investment products, such as money market mutual funds, stocks, bonds, annuities and Treasury securities, are not covered.

You can achieve a higher level of coverage at one institution by opening separately titled accounts. For example, two people could open a joint account and each could deposit $250,000. In addition, the interests of each qualified beneficiary named in a qualified revocable trust account are insured up to $250,000.

Temporary solution

Community bankers say they expect to get a very positive response from their customers, particularly small-business owners who often have payrolls that rise above the $100,000 limit. But they say this isn't deposit insurance reform; it's just a temporary solution to get through the current crisis. The next Congress will have to look at this very carefully and sort it out.

The mutual money market fund protection could well disappear as investors are expected to assume risk. But lawmakers could have a very difficult time rescinding the increase in FDIC coverage on deposit accounts.

"We're all going to have to regroup -- the banking industry and the money market mutual fund industry -- and figure out how much insurance we want, how we're going to pay for it -- and we're going to have to be sure there isn't some kind of inequity between the two industries in terms of federal insurance," says Stephen Verdier, senior vice president and director of congressional relations for the Independent Community Bankers of America.

The banking industry doesn't want a run on deposits at the end of next year, but it also doesn't want to see an increase in deposit insurance premiums. The FDIC can't charge higher premiums based on the new coverage levels during 2009, but it can raise premiums on what was insured prior to the new bill. In fact, the FDIC is expected to propose a premium increase along with a number of risk-based features that would enable banks that take less risk to pay less.

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