U.S. government stands behind deposits

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Dear Dr. Don,
I have heard from many sources that accounts covered by the Federal Deposit Insurance Corp. are not as guaranteed as many believe. For example, the FDIC does not require dollar-for-dollar reserves to back up deposited money in banks and that the FDIC only has a small portion covered. If that is true, it could take months to years to receive reimbursement if a major bank was to fail.

I know that it is unlikely those banks would fold, but could you clarify the above concerns.
— Jumpy John

Dear John,
An FDIC-insured deposit is backed by more than just the insurance fund. It carries a full faith and credit pledge of the U.S. government. I view the full faith and credit pledge as the government stating, “We’ll do what it takes to make you whole on your FDIC-insured investment.”

Congress said it a bit more eloquently with the passage of the Competitive Equality Banking Act of 1987, known as CEBA, that was signed into law by President Reagan Aug. 10, 1987.

Title IX: Full Faith and Credit of Federally Insured Financial Depository Institutions — Expresses the sense of the Congress to reaffirm that deposits, up to the statutorily prescribed amount, in federally-insured depository institutions are backed by the full faith and credit of the United States.

This excerpt from a FDIC advisory opinion written in November 1987 and presented on the FDIC Web site sounds a cautionary note about reading too much into the guarantee afforded by CEBA:

While any final conclusion on this matter rests with the Attorney General of the United States and ultimately with the courts, it is our opinion that Title IX of CEBA merely represents an expression of the intent of Congress to support the FDIC’s deposit insurance fund should the need arise. Title IX does not change any existing underlying law. It does not amend the Federal Deposit Insurance Act, nor does it or any other provision of CEBA alter the method by which the FDIC is funded. The FDIC continues to receive no government appropriations, and its funding continues to consist entirely of its income obtained from insurance assessments and from the return on investments made in government securities. In addition, the FDIC’s statutory authority to borrow up to $3 billion from the Treasury remains unchanged.

My read is that you shouldn’t lose sleep over this if your deposits are FDIC- or NCUSIF-insured. NCUSIF — the National Credit Union Share Insurance Fund — is the insurance fund for credit union shares and it, too, is backed by the full faith and credit of the U.S. government.

In the event of a bank failure, the FDIC would either move the insured depositor’s account to another FDIC-insured bank or give the depositor a check equal to the account balance, according to the FDIC Web site.

As to the timing of FDIC insurance payments to depositors, here’s what the FDIC says on the FAQ page of its Web site:

If a bank fails, what is the timeframe for payout of the funds that are insured if the bank cannot be acquired by another financial institution?

Federal law requires the FDIC to make payments of insured deposits “as soon as possible” upon the failure of an insured institution. While every bank failure is unique, there are standard policies and procedures that the FDIC follows in making deposit insurance payments. It is the FDIC’s goal to make deposit insurance payments within one business day of the failure of the insured institution. Typically, a bank that has failed will be closed on a Friday. The FDIC will then work the weekend to complete deposit insurance determinations for most deposits and be prepared on Monday to either transfer the insured portion of a deposit to another FDIC insured institution or provide deposit insurance payment checks. (Note: Some deposits that require supplemental documentation from the depositors, such as accounts linked to a living trust agreement or funds placed by a deposit broker, may take a little longer. The timing of the completion of the deposit insurance determination is based solely on the depositor providing the documentation needed by the FDIC to determine insurance coverage.)

I don’t think you should let the fear of a bank failure stop you from making an FDIC- or NCUSIF-insured deposit. In fact, I’ve argued in past columns that deposit insurance allows consumers the ability to chase yield in deciding where to invest an insured deposit.

Read, “CD is safe despite bank’s struggles,” for more on why I think it’s true.

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