Importance of FDIC Insurance

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SpartanBull
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Importance of FDIC Insurance

Post by SpartanBull » Wed Jan 24, 2018 1:02 am

I hear mentioned extremely frequently on this board about keeping FDIC limits in mind. But in practice is this a real concern? Take Chase Bank for example. So if somebody decides to have $1.5 million in an account instead of the protected $250k or whatever it is, don't they only get into trouble if Chase Bank goes under. And if an institution like JP Morgan Chase were to somehow go under, wouldn't we have much bigger problems at that point?
Not saying its a bad idea to be cautious, just wondering if theres any practicality to considering the fdic thing in decision making.

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randomizer
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Re: Importance of FDIC Insurance

Post by randomizer » Wed Jan 24, 2018 1:12 am

It matters. Without insurance the whole fractional reserve banking system would be too unstable, and even with it it is not a miracle cure. Don't be caught with your pants down.
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Phineas J. Whoopee
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Re: Importance of FDIC Insurance

Post by Phineas J. Whoopee » Wed Jan 24, 2018 1:16 am

SpartanBull wrote:
Wed Jan 24, 2018 1:02 am
I hear mentioned extremely frequently on this board about keeping FDIC limits in mind. But in practice is this a real concern? Take Chase Bank for example. So if somebody decides to have $1.5 million in an account instead of the protected $250k or whatever it is, don't they only get into trouble if Chase Bank goes under. And if an institution like JP Morgan Chase were to somehow go under, wouldn't we have much bigger problems at that point?
Not saying its a bad idea to be cautious, just wondering if theres any practicality to considering the fdic thing in decision making.
Bernie Madoff had something around $15 billion in a Chase checking account, and that wasn't the problem which ended his scheme.

The main point is systematically it won't be the case, so long as almost every individual consumer stays below the insured limit, that all the money disappears from the economy, as it used to do regularly before the FDIC was established in 1933.

PJW

denovo
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Re: Importance of FDIC Insurance

Post by denovo » Wed Jan 24, 2018 1:20 am

SpartanBull wrote:
Wed Jan 24, 2018 1:02 am
And if an institution like JP Morgan Chase were to somehow go under, wouldn't we have much bigger problems at that point?
Not saying its a bad idea to be cautious, just wondering if theres any practicality to considering the fdic thing in decision making.
Yes, it's absolutely necessary to stay below the limits. Were you following the financial world around 2008? Many big banks were near the breaking point. There would be other big things going in if banks are going insolvent, but there's no need to add to one's problems by having uninsured deposits.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Phineas J. Whoopee
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Re: Importance of FDIC Insurance

Post by Phineas J. Whoopee » Wed Jan 24, 2018 1:25 am

Yeah. I remember when Citi became a penny stock.
PJW

123
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Re: Importance of FDIC Insurance

Post by 123 » Wed Jan 24, 2018 1:31 am

It might be time to remember the S&L crisis of the 1980's when it seemed just about every Friday evening it was on the late news about another S&L being closed by the authorities and the branches being taken over by another S&L/bank. The shutdowns just didn't seem to end, in my major metropolitan area there were some weeks where there wren't any and other weeks when there were multiple shutdowns. The process seemed to work okay as long as their was a bigger S&L/bank that could take over the failed institution. But now we've got megabanks and if one of the top 5 had to be shut down we would be in a pickle.
The closest helping hand is at the end of your own arm.

AlohaJoe
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Re: Importance of FDIC Insurance

Post by AlohaJoe » Wed Jan 24, 2018 2:06 am

randomizer wrote:
Wed Jan 24, 2018 1:12 am
Without insurance the whole fractional reserve banking system would be too unstable
This isn't true. It basically didn't exist outside of the US anywhere until after the 1960s and yet the whole world ran on fractional reserve banking. Deposit insurance was an American invention because America, uniquely, didn't have any national banks (and generally passed laws restricting competition, leaving lots of small regional banks) and so American banks were exposed to large amounts of undiversifiable "unit banking" risk.

No other country besides the US had deposit insurance before the 1960s. Even by 1980, only 20 countries had deposit insurance.

Surely that's enough put the lie to the claim that insurance is somehow a requirement of a stable fractional reserve banking system.

The current spread of deposit insurance (over 100 countries now) is largely due to the IMF, World Bank, and the EU "requiring" it from the 1990s onward. Between 1994 and 1998, 16 European countries added deposit insurance when the EU made it a requirement of admission.

Research in the US, Canada, Germany, Bolivia, Australia and basically everywhere has shown that the introduction of deposit insurance causes banks to take on more leverage, reduce their reserves, keep capital ratios at the legal minimum, a greater probability of failure, greater exposure to macroeconomic factors, more frequent banking crises, and larger contractions during banking crises.

A National Bureau of Economic Research review paper concluded
In summary, the empirical literature on the consequences of bank liability insurance is vast and unusually uniform in its conclusions. Bank liability insurance increases bank risk rather than reducing it.

...the period since 1970 has witnessed a global pandemic of banking crises around the world, and the frequency and severity of banking crises has been unprecedented. The empirical literature on the consequences of deposit insurance shows that it has played a central role in this dramatic escalation of banking instability
However, deposit insurance is a kind of tragedy of commons. Each individual depositor is safer in a sense, at the expense of making the entire system riskier. So it makes sense that people would want it. Who wouldn't want a guarantee that your $250,000 in safe in exchange for some unquantifiable increase in systemic risk that might even ever directly affect you?

Also, historically, deposit insurance has been a subsidy to politically favoured classes of people. In the US it was originally a subsidy to farmers, which is why the first deposit insurances were state programs in Indiana, Ohio, and Iowa.

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randomizer
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Re: Importance of FDIC Insurance

Post by randomizer » Wed Jan 24, 2018 2:31 am

AlohaJoe wrote:
Wed Jan 24, 2018 2:06 am
randomizer wrote:
Wed Jan 24, 2018 1:12 am
Without insurance the whole fractional reserve banking system would be too unstable
This isn't true. It basically didn't exist outside of the US anywhere until after the 1960s and yet the whole world ran on fractional reserve banking. Deposit insurance was an American invention because America, uniquely, didn't have any national banks (and generally passed laws restricting competition, leaving lots of small regional banks) and so American banks were exposed to large amounts of undiversifiable "unit banking" risk.

No other country besides the US had deposit insurance before the 1960s. Even by 1980, only 20 countries had deposit insurance.

Surely that's enough put the lie to the claim that insurance is somehow a requirement of a stable fractional reserve banking system.

The current spread of deposit insurance (over 100 countries now) is largely due to the IMF, World Bank, and the EU "requiring" it from the 1990s onward. Between 1994 and 1998, 16 European countries added deposit insurance when the EU made it a requirement of admission.

Research in the US, Canada, Germany, Bolivia, Australia and basically everywhere has shown that the introduction of deposit insurance causes banks to take on more leverage, reduce their reserves, keep capital ratios at the legal minimum, a greater probability of failure, greater exposure to macroeconomic factors, more frequent banking crises, and larger contractions during banking crises.

A National Bureau of Economic Research review paper concluded
In summary, the empirical literature on the consequences of bank liability insurance is vast and unusually uniform in its conclusions. Bank liability insurance increases bank risk rather than reducing it.

...the period since 1970 has witnessed a global pandemic of banking crises around the world, and the frequency and severity of banking crises has been unprecedented. The empirical literature on the consequences of deposit insurance shows that it has played a central role in this dramatic escalation of banking instability
However, deposit insurance is a kind of tragedy of commons. Each individual depositor is safer in a sense, at the expense of making the entire system riskier. So it makes sense that people would want it. Who wouldn't want a guarantee that your $250,000 in safe in exchange for some unquantifiable increase in systemic risk that might even ever directly affect you?

Also, historically, deposit insurance has been a subsidy to politically favoured classes of people. In the US it was originally a subsidy to farmers, which is why the first deposit insurances were state programs in Indiana, Ohio, and Iowa.
Some countering opinions here: https://youtu.be/8SAMey9Gl5I
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jalbert
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Re: Importance of FDIC Insurance

Post by jalbert » Wed Jan 24, 2018 3:01 am

Take Chase Bank for example. So if somebody decides to have $1.5 million in an account instead of the protected $250k or whatever it is, don't they only get into trouble if Chase Bank goes under. And if an institution like JP Morgan Chase were to somehow go under, wouldn't we have much bigger problems at that point?
I would flip it around. If Chase Bank were insolvent, we would have big problems, but you would have much bigger problems if your assets were there without FDIC insurance protection.
Risk is not a guarantor of return.

denovo
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Re: Importance of FDIC Insurance

Post by denovo » Wed Jan 24, 2018 3:08 am

jalbert wrote:
Wed Jan 24, 2018 3:01 am
Take Chase Bank for example. So if somebody decides to have $1.5 million in an account instead of the protected $250k or whatever it is, don't they only get into trouble if Chase Bank goes under. And if an institution like JP Morgan Chase were to somehow go under, wouldn't we have much bigger problems at that point?
I would flip it around. If Chase Bank were insolvent, we would have big problems, but you would have much bigger problems if your assets were there without FDIC insurance protection.
+1
"Don't trust everything you read on the Internet"- Abraham Lincoln

Afty
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Re: Importance of FDIC Insurance

Post by Afty » Wed Jan 24, 2018 3:19 am

During 2009 I had some brokered CDs where the bank failed. FDIC insurance got me my money back.

gsmith
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Re: Importance of FDIC Insurance

Post by gsmith » Wed Jan 24, 2018 4:27 am

I have done a lot of research on this topic, and hopefully it might be of help....
Short Answer: It's not the end of the world if you don't have it, but it's easy enough to get that you should.

First point:
FDIC treats each benefitiary of a Living Trust as a depositor, so a living trust that gives $10 to four different charities, (plus yourself as grantor), you will have $1.25 million in insurance per bank.
When the number of beneficiaries is five or fewer, the calculation of coverage is simple: the number of owners multiplied by the number of beneficiaries multiplied by $250,000. If the product is greater than the aggregate balance of the accounts, the funds will be fully insured. If the product is less than the aggregate balance of the accounts, the excess will be uninsured.
https://www.fdic.gov/deposit/diguideban ... ocable.pdf

Second Point:
People make the assumption that uninsured deposits will not be paid.
In accordance with Federal law, allowed claims will be paid, after administrative expenses, in the following order of priority:
Depositors
General Unsecured Creditors
Subordinated Debt
Stockholders
.
https://www.fdic.gov/bank/individual/fa ... #dividends

https://closedbanks.fdic.gov/dividends/
Generally From the few banks I've looked at, uninsured deposits are repaid between 35%-90%.
This 65% of uninsured deposits (Which takes some time to receive) is on top of the 100% recovery of insured deposits.

Call_Me_Op
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Re: Importance of FDIC Insurance

Post by Call_Me_Op » Wed Jan 24, 2018 6:49 am

SpartanBull wrote:
Wed Jan 24, 2018 1:02 am
I hear mentioned extremely frequently on this board about keeping FDIC limits in mind. But in practice is this a real concern?
Yes, large institutions fail all of the time. Why risk it?
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

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dm200
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Re: Importance of FDIC Insurance

Post by dm200 » Wed Jan 24, 2018 8:52 am

I believe federal insurance (FDIC for banks and NCUA for credit unions) is important.

The risks are low - but not zero. Even if a bank or credit union fails, and FDIC or NCUA steps in, in most (but not all) cases - a significant percentage of the uninsured amounts are paid. Even if you do get most of the uninsured money, there are delays.

In a few small credit union failures, the amounts paid over the NCUA insurance were (or were close to) zero.

I can't give a link, but I believe the FDIC site shows what was paid out on FDIC insured banks that failed - over the FDIC limit.

An organization I manage holds a lot of brokered CDs. We had $100,000 at IndyMac when it failed and the FDIC limit was $100,000. Got every cent in a few weeks. When the FDIC limit was $250,000 - we held about $500,000 at 3 FDIC insured banks in Puerto Rico - got every penny in a few days.

EvelynTroy
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Re: Importance of FDIC Insurance

Post by EvelynTroy » Wed Jan 24, 2018 10:54 am

Article explains the importance of FDIC insurance and also offers another providing an overview of bank safety - you can also check on the health of particular banks/credit unions using

https://www.depositaccounts.com/blog/sa ... rance.html

If you are not concerned about the financial health of your bank or credit union, you should be. Many folks assume that because their accounts are protected by the FDIC or NCUA, there is nothing to worry about – even if the financial institution fails. While this is largely true as long as you are below the $250,000 maximum insured limit, there are a number of inconveniences associated with having your money in a failed bank or one that is on the verge of failing:

https://www.depositaccounts.com/banks/health.aspx

Evelyn

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snodog
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Re: Importance of FDIC Insurance

Post by snodog » Wed Jan 24, 2018 3:45 pm

Not only do I think FDIC insurance is important, but I also believe all your money should be guaranteed not just $250,000.

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dm200
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Re: Importance of FDIC Insurance

Post by dm200 » Wed Jan 24, 2018 4:11 pm

snodog wrote:
Wed Jan 24, 2018 3:45 pm
Not only do I think FDIC insurance is important, but I also believe all your money should be guaranteed not just $250,000.
Banks and credit unions probably do not want higher limits because banks and credit unions (not the taxpayers) fund the FDIC and NCUA Insurance funds. That would increase their operating expenses.

tj
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Re: Importance of FDIC Insurance

Post by tj » Wed Jan 24, 2018 6:24 pm

snodog wrote:
Wed Jan 24, 2018 3:45 pm
Not only do I think FDIC insurance is important, but I also believe all your money should be guaranteed not just $250,000.
There are enough banks and credit unions that individuals should not run into this being an issues. Some of the big banks even have multiple banks for their clients to get over the limit. E.G. Capital One has 2 banks, so does Schwab.

Having no limits would eliminate every institution's need for short term Treasury bills.

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