FDIC insurance: You can bank on it

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Socking away your money in a bank account leaves many investors queasy — and for good reason. Personal loss resulting from bank failures has affected too many Americans. According to Tom Pieplow, associate professor of management at Athens State University, in Athens, Ala., keeping your money safe is a matter of choosing bank accounts backed by the Federal Deposit Insurance Corp. and diversifying. He also suggests that, as a society, future generations will be better off financially if children learn about economics, the government’s role in consumer investing and how to make good money decisions.

Given widespread concern about bank failures, what suggestions can you give an individual when placing his or her money in a bank?

Consumers should make their financial decisions using objective data versus simply relying upon marketing information. In terms of a bank’s viability, I firmly believe the FDIC offers the best resource to protect consumers through their supervision of financial institutions. As an independent agency created by Congress, they offer consumers a great source for objective and comprehensive financial and structural information about every institution they insure.

Many have argued that faulty credit ratings and flawed rating processes were primary contributors to the global financial crisis and because of that, consumers’ confidence in rating agencies has waned. Let me be clear — the FDIC is not perfect, but their scrutiny of financial institutions is tailored to ferret out those riskier banking alternatives and allow consumers an objective view of any institution they are considering investing with.

When developing their investment strategies, consumers should also ensure they have diversity. Banks offer the most stable and secure of financial growth options, but every financial planner I’ve worked with advocates a mixture of insured deposits with other alternatives. No one should have all their eggs in one basket. When working with a financial planner, you can decide what level of risk you are willing to take on and from that, craft a plan that best fits your strategy. In my personal finances, I have banking deposits but I do not have all with a single institution. I have chosen to invest with several highly rated institutions.

What should the government do to help individuals who have lost money due to a bank closure?

Short term, government has a responsibility to fully meet the $250,000 threshold for deposits made with any FDIC-insured depository institutions, and history demonstrates they are performing exceptionally well. The FDIC has satisfied every obligation to consumers at fully insured value, and any lost money comes from institutions outside of the FDIC’s umbrella or from deposits exceeding coverage limitations. But strategically, I believe any bank closure is a red flag and a cause for concern.

Please understand: I do not believe government holds the answer for any problem — but taxpayers could ultimately be responsible for any payments made by the FDIC that exceeds (the) fund’s ability to pay. The FDIC has taken a proactive role in supervising and auditing banks, and it is my opinion that it is judicious to expect all insured institutions to comply with reasonable standards.

These standards should constantly be assessed and when found to be no longer relevant, revised or even discarded. But when a bank fails, this may be an indication that a review of these standards is in order to ensure consumers have access to unbiased, objective data and that coverage is adequate.

Do you feel financial education classes should be incorporated into high school curriculums to teach young adults how to be financially fit?

In my view, every student should have classes in fundamental macroeconomic theories if they ever expect to thrive in today’s economy. Capitalism is the economic system of America, yet few students understand the effects of inflation, interest rates, taxes, etc. on human behavior. Students today want to be a part of the political process, but I find that many lack the foundational knowledge of capitalism that is at the core of much of today’s political discourse. The Council of Economic Education focuses on economic education in high schools and has a strong program here in Alabama.

During one of my recent classes, we discussed the call by many to raise taxes on wealthier Americans. I explained that no one, rich or poor, takes their money and simply buries it in the ground or stuffs it in a mattress. Instead, all consumers place money back into the economy using investments, savings or spending. So raising taxes can also be viewed as a simple question of who does a better job of putting money into the economy — government or consumers.

If you advocate an activist government where federal agencies use monies secured through taxes to satisfy a variety of national level demands, you would favor government. But someone who believes an individual, whether rich or poor, is best equipped to place money into our economy, raising taxes would be counterproductive. My point wasn’t to debate the merits of social programs, the national debt or the efficiency of government but to allow students to view a political issue through an economic prism.

Young adults also have a responsibility to stay informed, and I strongly advocate using a host of diverse sources to do this. There are several economists and financial advisers whose readings (I) regularly track even though their views span the economic spectrum. For example, Paul Krugman, Jeffrey Sachs and Milton Friedman postulate widely divergent economic theories — yet I respect the opinions of each and regularly read their works.

Dave Ramsey offers sound financial advice, but I would never make a singular decision without first researching the works of others who I equally admire, even if they hold somewhat different opinions. In today’s digital age, data and information have never been more readily available and coupled with an economic foundation built in high school, young adults have the tools to be financially fit.

What do you think of the temporary unlimited deposit insurance coverage in the Dodd-Frank Wall Street Reform and Consumer Protection Act?

This particular section of the act revises the FDIC’s deposit insurance regulations to now embrace noninterest-bearing transaction accounts, such as a checking account, as a new deposit insurance account category. All funds are fully insured, without limit, and the coverage is separate from the normal coverage provided to depositors for other accounts at an insured depository institution. This section of the Act is temporary and set to expire Dec. 31 of this year. I think it is important to note this was not a new program but in actuality continued coverage that was instituted on an emergency basis in October 2008 under the Transaction Account Guarantee Program, or TAGP, in an effort to stabilize the financial system.

As you are aware, specific elements of Dodd-Frank were controversial and some have argued this section simply attempts to bring the various nonbanking financial industries under a more uniform set of regulations overseen in part by the Federal Reserve. Even though this extension of TAGP was employed to reduce consumer uncertainty and rebuild confidence in the financial system, I have concerns of possible unintended consequences when unlimited deposit insurance coverage is provided and how providing such coverage for these accounts actually promotes moral hazard.

I believe that moral hazard played a central role in the events leading up to the financial crisis and if future reforms are to be well-designed and crafted to prevent further disasters, we must understand that moral hazard is fundamental to understanding how the economy works. Moral hazard involves increased risk-taking, and if I assume both the risk and associated consequences of my uncertain actions, I will act more conscientiously.

Some would argue that these noninterest-bearing accounts are the safest possible and their associated risk low. But prior to 2008, home investments were also considered a low risk and we found out differently. As confidence in the system increases, the need for renewing this section will diminish but my real concern resides outside consumer sureness and instead focuses on moral hazard.

Special thanks to Tom Pieplow, associate professor of management at Athens State University in Athens, Ala., for joining us in the interview.