Question about FDIC insurance

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
User avatar
Topic Author
danielc
Posts: 535
Joined: Sun Dec 10, 2017 4:48 am
Location: Pennsylvania, USA
Contact:

Question about FDIC insurance

Post by danielc » Fri Dec 28, 2018 11:55 pm

Hello,

I'm trying to understand better how FDIC insurance works. I have heard that FDIC insured accounts are backed by the "full faith and confidence of the United States". But the FDIC is a US government corporation that works independently and is not funded by the US government. That means that it must have a finite amount of money; it cannot siphon the US Treasury and it cannot print money. It must be theoretically possible (however unlikely) that a sufficiently widespread run on the banks could exceed the FDIC's reserves. What would happen then? Is there a rule written somewhere that if the FDIC gets depleted, the US Treasury will start dumping money into it to cover all the insured accounts? If not, I just don't see how one could say that an FDIC insured account has the full faith and confidence of the U.S.

Thanks for the help.

typical.investor
Posts: 449
Joined: Mon Jun 11, 2018 3:17 am

Re: Question about FDIC insurance

Post by typical.investor » Sat Dec 29, 2018 9:53 am

As part of a 1987 legislative enactment, Congress passed a measure stating "it is the sense of the Congress that it should 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."

See https://en.wikipedia.org/wiki/Federal_D ... orporation

So I would guess that at any time Congress could pull the plug. Also, given that the US President assigns three of five directors including the chairman (with approval of the Senate), it would seem that perhaps there might be a way to remove directors and impose a President's will.

So I think it's 100% safe until someone decides it isn't.

User avatar
GMCZ71
Posts: 18
Joined: Sat Oct 13, 2018 8:05 am
Location: McMinnville, Or

Re: Question about FDIC insurance

Post by GMCZ71 » Sat Dec 29, 2018 10:06 am

Title I of the Dodd-Frank Act requires each banking entity to periodically submit to the FDIC and the Federal Reserve a resolution plan that must address the company’s plans for its rapid and orderly resolution under the U.S. Bankruptcy Code.

Title II of the Dodd-Frank Act provides the FDIC with new powers to resolve by establishing the orderly liquidation authority (OLA). Under the OLA, the FDIC may be appointed receiver for any U.S. financial company that meets specified criteria, including being in default or in danger of default, and whose resolution under the U.S. Bankruptcy Code (or other relevant insolvency process) would likely create systemic instability.

Title II requires that the losses of any financial company placed into receivership will not be borne by taxpayers, but by common and preferred stockholders, debt holders, and other unsecured creditors, and that management responsible for the condition of the financial company will be replaced. Once appointed receiver for a failed financial company, the FDIC would be required to carry out a resolution of the company in a manner that mitigates risk to financial stability and minimizes moral hazard. Any costs borne by the U.S. authorities in resolving the institution not paid from proceeds of the resolution will be recovered from the industry.

Dodd-Frank, Title II, Sec. 209 (b):

if claims are made against a firm, they will be paid in this order:

1.administrative costs
2.the government
3.wages, salaries, or commissions of employees
4.contributions to employee benefit plans
5.any other general or senior liability of the company
6.any junior obligation
7.salaries of executives and directors of the company; and
8.obligations to shareholders, members, general partners, and other equity holders

The liquidation during resolution is done at the discretion of the receiver, the FDIC, on the basis of salvaging what is, in its view, most important for financial stability. Under Title II, Sec. 9 E, it is stated that the FDIC, “shall, to the greatest extent practicable, conduct its operations in a manner that–..(iii) mitigates the potential for serious adverse effects to the financial system.”

When you deposit money in a checking or savings account, that money no longer belongs to you. Technically and legally, it becomes the property of the bank, and the bank just issues you what amounts to an IOU. The bank considers this as an unsecured debt./quote]
Before 2008 your deposits were insured/paid higher up that list, I think around # 4. After Dodd-Frank a deposit(checking,savings,cd) becomes a share holder moving you down to #8. Nobody seems to know what will happen if enough banks fail and deposits are greater then the FDIC funds of $95 bil
John

User avatar
Topic Author
danielc
Posts: 535
Joined: Sun Dec 10, 2017 4:48 am
Location: Pennsylvania, USA
Contact:

Re: Question about FDIC insurance

Post by danielc » Sat Dec 29, 2018 11:12 am

typical.investor wrote:
Sat Dec 29, 2018 9:53 am
As part of a 1987 legislative enactment, Congress passed a measure stating "it is the sense of the Congress that it should 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."

See https://en.wikipedia.org/wiki/Federal_D ... orporation

So I would guess that at any time Congress could pull the plug. Also, given that the US President assigns three of five directors including the chairman (with approval of the Senate), it would seem that perhaps there might be a way to remove directors and impose a President's will.
Yeah but... none of that seems to imply that any government funds will be used to cover deposits. The post from GMCZ71 says that my bank deposit is just an IOU that can be defaulted on. So... while I have a lot of confidence in FDIC insurance, it seems to just be a private insurance. I'm not seeing a lot of substance behind "full faith and confidence of the U.S."

typical.investor wrote:
Sat Dec 29, 2018 9:53 am
So I think it's 100% safe until someone decides it isn't.
So it seems.

It also looks to me like US Treasuries are more secure than FDIC-insured bank accounts because US Treasuries ARE direct debt obligations of the U.S. Government. Would you agree with that?

mw1739
Posts: 544
Joined: Mon Mar 21, 2011 5:44 pm

Re: Question about FDIC insurance

Post by mw1739 » Sat Dec 29, 2018 11:33 am

Refer to the Federal Deposit Insurance Act. The FDIC has a $100 billion line of credit with Treasury and can extend it up to $500 billion upon a vote from the FDIC and Federal Reserve Boards.

I sleep well at night knowing my funds are protected by the full faith and credit of the United States.

User avatar
JoMoney
Posts: 6629
Joined: Tue Jul 23, 2013 5:31 am

Re: Question about FDIC insurance

Post by JoMoney » Sat Dec 29, 2018 11:39 am

Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

typical.investor
Posts: 449
Joined: Mon Jun 11, 2018 3:17 am

Re: Question about FDIC insurance

Post by typical.investor » Sat Dec 29, 2018 11:45 am

danielc wrote:
Sat Dec 29, 2018 11:12 am
typical.investor wrote:
Sat Dec 29, 2018 9:53 am
As part of a 1987 legislative enactment, Congress passed a measure stating "it is the sense of the Congress that it should 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."

See https://en.wikipedia.org/wiki/Federal_D ... orporation

So I would guess that at any time Congress could pull the plug. Also, given that the US President assigns three of five directors including the chairman (with approval of the Senate), it would seem that perhaps there might be a way to remove directors and impose a President's will.
Yeah but... none of that seems to imply that any government funds will be used to cover deposits. The post from GMCZ71 says that my bank deposit is just an IOU that can be defaulted on. So... while I have a lot of confidence in FDIC insurance, it seems to just be a private insurance. I'm not seeing a lot of substance behind "full faith and confidence of the U.S."

typical.investor wrote:
Sat Dec 29, 2018 9:53 am
So I think it's 100% safe until someone decides it isn't.
So it seems.

It also looks to me like US Treasuries are more secure than FDIC-insured bank accounts because US Treasuries ARE direct debt obligations of the U.S. Government. Would you agree with that?
Yes, to some degree. But whether treasuries default or FDIC isn't fully honored are both possibilities I think. So extremely unlikely though so as not worth planning for. Just learned that a crisis scenario for the moon landing was known but not planned for as there were so many other more likely scenarios that had to be addressed. Stupid shutdown is cancelling some of the bus tours. You know, who knows.
FDIC-87-36
November 9, 1987
Alan J. Kaplan, Counsel
Your October 7, 1987 letter asks whether the full faith and credit of the United States Government stands behind the Federal Deposit Insurance Corporation and its deposit insurance fund. You noted that in my earlier letter to you, dated August 26, 1985, I stated that a joint resolution of Congress (H.R. Con. Res. 290) adopted in March 1982, which reaffirmed that the United States pledges its full faith and credit behind the federal deposit insurance funds, may have served as a moral pledge on the part of Congress to support the deposit insurance funds should they ever need it, but, because of its status as a non-binding resolution, did not serve to create any legal liability on the part of the United States Government to support the funds. You now ask whether Congress has passed a statute that makes the United States Government legally liable for any and all obligations of the FDIC.
Title IX of the Competitive Equality Banking Act of 1987 ("CEBA"), signed into law by President Reagan on August 10, 1987, provides:
TITLE IX–FULL FAITH AND CREDIT OF
FEDERALLY INSURED DEPOSITORY INSTITUTIONS
SEC. 901. REAFFIRMATION OF SECURITY OF FUNDS DEPOSITED
IN FEDERALLY INSURED DEPOSITORY INSTITUTIONS.
(a) FINDINGS.--The Congress finds and declares that--
(1) since the 1930's, the American people have relied upon Federal Deposit insurance to ensure the safety and security of their funds in federally insured depository institutions; and
(2) the safety security [sic] of such funds is an essential element of the American financial system.
(b) SENSE OF CONGRESS.--In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should 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.
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 $3.0 billion from the Treasury remains unchanged.
Based on that, specifically the view that the Attorney General has a say, and current events where the Attorney General isn't exactly independent and replaceable if their views differ than their boss, it does seem that treasuries offer more security.

I mean as a pure legal matter, if the FDIC was in trouble and a US President didn't want to fund it, it would seem the US President if desired could place an Attorney General into office who would take the view that it isn't a Federal responsibility. Whether or not courts would agree would seem another matter, but would likely take a long time to resolve.
Last edited by typical.investor on Sat Dec 29, 2018 11:55 am, edited 2 times in total.

Geologist
Posts: 1223
Joined: Fri Jan 02, 2009 7:35 pm

Re: Question about FDIC insurance

Post by Geologist » Sat Dec 29, 2018 11:45 am

JoMoney wrote:
Sat Dec 29, 2018 11:39 am
Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.

Geologist
Posts: 1223
Joined: Fri Jan 02, 2009 7:35 pm

Re: Question about FDIC insurance

Post by Geologist » Sat Dec 29, 2018 11:49 am

mw1739 wrote:
Sat Dec 29, 2018 11:33 am
Refer to the Federal Deposit Insurance Act. The FDIC has a $100 billion line of credit with Treasury and can extend it up to $500 billion upon a vote from the FDIC and Federal Reserve Boards.

I sleep well at night knowing my funds are protected by the full faith and credit of the United States.
mw1739 is correct. If you google, you can find any number of articles discussing the potential need for the FDIC to draw on its line of credit with the Treasury during the 2008-2009 banking crisis. The FDIC needs no further authorization from Congress to do this if necessary.

Danielc: You seem to be a little confused furthermore. In your original post, you refer to the FDIC (correctly) as a government corporation and later as private insurance. It can't be both.
Last edited by Geologist on Sat Dec 29, 2018 11:51 am, edited 1 time in total.

User avatar
JoMoney
Posts: 6629
Joined: Tue Jul 23, 2013 5:31 am

Re: Question about FDIC insurance

Post by JoMoney » Sat Dec 29, 2018 11:51 am

Geologist wrote:
Sat Dec 29, 2018 11:45 am
JoMoney wrote:
Sat Dec 29, 2018 11:39 am
Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.
OP specifically mentioned "widespread" run on the banks. Individual banks do fail, but that's not a significant stress to the FDIC or banking system.
A very large banks failure could be problematic, but the threshold for where they're allowed to fail and when they're considered "to big to fail" is an interesting line... People still argue about whether or not Lehman Brothers should have been allowed to fail.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Geologist
Posts: 1223
Joined: Fri Jan 02, 2009 7:35 pm

Re: Question about FDIC insurance

Post by Geologist » Sat Dec 29, 2018 11:54 am

JoMoney wrote:
Sat Dec 29, 2018 11:51 am
Geologist wrote:
Sat Dec 29, 2018 11:45 am
JoMoney wrote:
Sat Dec 29, 2018 11:39 am
Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.
OP specifically mentioned "widespread" run on the banks. Individual banks do fail, but that's not a significant stress to the FDIC or banking system.
A very large banks failure could be problematic, but the threshold for where they're allowed to fail and when they're considered "to big to fail" is an interesting line... People still argue about whether or not Lehman Brothers should have been allowed to fail.
I'm afraid I still disagree with you. The beginning of the Great Depression did mark a widespread run on banks (hence FDR's bank holiday) and the Federal Reserve didn't prevent or solve it, at least as far as individual depositors were concerned. That is why Federal deposit insurance came into being. Your response didn't address his issue at all.

User avatar
JoMoney
Posts: 6629
Joined: Tue Jul 23, 2013 5:31 am

Re: Question about FDIC insurance

Post by JoMoney » Sat Dec 29, 2018 12:02 pm

Geologist wrote:
Sat Dec 29, 2018 11:54 am
JoMoney wrote:
Sat Dec 29, 2018 11:51 am
Geologist wrote:
Sat Dec 29, 2018 11:45 am
JoMoney wrote:
Sat Dec 29, 2018 11:39 am
Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.
OP specifically mentioned "widespread" run on the banks. Individual banks do fail, but that's not a significant stress to the FDIC or banking system.
A very large banks failure could be problematic, but the threshold for where they're allowed to fail and when they're considered "to big to fail" is an interesting line... People still argue about whether or not Lehman Brothers should have been allowed to fail.
I'm afraid I still disagree with you. The beginning of the Great Depression did mark a widespread run on banks (hence FDR's bank holiday) and the Federal Reserve didn't prevent or solve it, at least as far as individual depositors were concerned. That is why Federal deposit insurance came into being. Your response didn't address his issue at all.
What did I say that you disagree with?
We do not live in a world of hard money backed by gold/silver as was the case during the great depression. Money and the banking system are quite different today. The Fed did not have the same ability, or role in the banking and money system then as it does today.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Geologist
Posts: 1223
Joined: Fri Jan 02, 2009 7:35 pm

Re: Question about FDIC insurance

Post by Geologist » Sat Dec 29, 2018 12:08 pm

JoMoney wrote:
Sat Dec 29, 2018 12:02 pm
Geologist wrote:
Sat Dec 29, 2018 11:54 am
JoMoney wrote:
Sat Dec 29, 2018 11:51 am
Geologist wrote:
Sat Dec 29, 2018 11:45 am
JoMoney wrote:
Sat Dec 29, 2018 11:39 am
Before FDIC insurance was even necessary, if there was a wide-spread systemic cash run, the Federal Reserve (who can print money against loans borrowed by other banks) would step in to save the system. They would lower reserve requirements, and open up discount windows to allow banks to borrow money at next to nothing.
I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.
OP specifically mentioned "widespread" run on the banks. Individual banks do fail, but that's not a significant stress to the FDIC or banking system.
A very large banks failure could be problematic, but the threshold for where they're allowed to fail and when they're considered "to big to fail" is an interesting line... People still argue about whether or not Lehman Brothers should have been allowed to fail.
I'm afraid I still disagree with you. The beginning of the Great Depression did mark a widespread run on banks (hence FDR's bank holiday) and the Federal Reserve didn't prevent or solve it, at least as far as individual depositors were concerned. That is why Federal deposit insurance came into being. Your response didn't address his issue at all.
What did I say that you disagree with?
We do not live in a world of hard money backed by gold/silver as was the case during the great depression. Money and the banking system are quite different today. The Fed did not have the same ability, or role in the banking and money system then as it does today.
Perhaps we are merely talking at cross-purposes. However, the Federal Reserve has not been able to prevent the FDIC from needing to resort to borrowing money from the US Treasury to cover depositor's losses above its reserves. The FDIC had to do so during the Savings & Loans crisis of the early 1990's. This was not caused by a depositor's run on the S&L's but the S&L's became insolvent and the Federal Reserve didn't prevent it via the discount window or any other way (and this was long after hard money backing). Therefore, it does show the FDIC can get money from the Treasury, if it needs it, to make depositors whole. This is what the OP is concerned about.

Turbo29
Posts: 299
Joined: Tue May 01, 2018 7:12 am

Re: Question about FDIC insurance

Post by Turbo29 » Sat Dec 29, 2018 12:14 pm

Geologist wrote:
Sat Dec 29, 2018 12:08 pm
JoMoney wrote:
Sat Dec 29, 2018 12:02 pm
Geologist wrote:
Sat Dec 29, 2018 11:54 am
JoMoney wrote:
Sat Dec 29, 2018 11:51 am
Geologist wrote:
Sat Dec 29, 2018 11:45 am


I think you are missing the OP's point, in which he is worried about the safety of his money not the banking system. Banks certainly do fail no matter what you say the Federal Reserve can do and before creation of the FDIC, individual depositors certainly did lose money in failed banks. I know because my father lost money in a bank that failed at the beginning of the Great Depression.
OP specifically mentioned "widespread" run on the banks. Individual banks do fail, but that's not a significant stress to the FDIC or banking system.
A very large banks failure could be problematic, but the threshold for where they're allowed to fail and when they're considered "to big to fail" is an interesting line... People still argue about whether or not Lehman Brothers should have been allowed to fail.
I'm afraid I still disagree with you. The beginning of the Great Depression did mark a widespread run on banks (hence FDR's bank holiday) and the Federal Reserve didn't prevent or solve it, at least as far as individual depositors were concerned. That is why Federal deposit insurance came into being. Your response didn't address his issue at all.
What did I say that you disagree with?
We do not live in a world of hard money backed by gold/silver as was the case during the great depression. Money and the banking system are quite different today. The Fed did not have the same ability, or role in the banking and money system then as it does today.
Perhaps we are merely talking at cross-purposes. However, the Federal Reserve has not been able to prevent the FDIC from needing to resort to borrowing money from the US Treasury to cover depositor's losses above its reserves. The FDIC had to do so during the Savings & Loans crisis of the early 1990's. This was not caused by a depositor's run on the S&L's but the S&L's became insolvent and the Federal Reserve didn't prevent it via the discount window or any other way (and this was long after hard money backing). Therefore, it does show the FDIC can get money from the Treasury, if it needs it, to make depositors whole. This is what the OP is concerned about.
Actually at the time of the S&L crisis Savings and Loans were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) which was administered by the Federal Home Loan Bank. (I still remember the FSLIC stickers on the door of where I had my first savings account.)

The FSLIC did not make it through the crisis.
The Federal Savings and Loan Insurance Corporation (FSLIC) was an institution that administered deposit insurance for savings and loan institutions in the United States. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) abolished it and transferred the responsibility for savings and loan deposit insurance to the Federal Deposit Insurance Corporation (FDIC). The FSLIC Resolution Fund was created to assume all the assets and liabilities of the FSLIC, which was to be funded by the Financing Corporation (FICO).

In the 1980s, during the savings and loan crisis, the FSLIC became insolvent. It was recapitalized with taxpayer money several times, with $15 billion in 1986 and $10.75 billion in 1987; however, by 1989 it was too insolvent to save. Pursuant to the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), the FSLIC was abolished along with the FHLBB, and the FSLIC savings and loan deposit insurance responsibility was transferred to the FDIC.
https://en.wikipedia.org/wiki/Federal_S ... orporation

Geologist
Posts: 1223
Joined: Fri Jan 02, 2009 7:35 pm

Re: Question about FDIC insurance

Post by Geologist » Sat Dec 29, 2018 12:34 pm

There were related FDIC-bank failures in the early 1990's (the Bank of New England alone caused the FDIC to get $3 billion from the Treasury) in addition to S&L's associated with FSLIC issues. The FDIC bank insurance fund overall had a balance of negative $7 billion in 1991. (see Chapter 6 of the "Brief History of Deposit Insurance" on the FDIC website). The point remains that when the FDIC needs funds beyond what is in its insurance fund, it can borrow funds from the US Treasury (now up to $500 billion, a limit set in May 2009).

User avatar
dm200
Posts: 19069
Joined: Mon Feb 26, 2007 2:21 pm
Location: Washington DC area

Re: Question about FDIC insurance

Post by dm200 » Sat Dec 29, 2018 12:50 pm

The beginning of the Great Depression did mark a widespread run on banks (hence FDR's bank holiday) and the Federal Reserve didn't prevent or solve it, at least as far as individual depositors were concerned. That is why Federal deposit insurance came into being.
As a child in the 1950's, I recall my maternal grandmother recounting bank failure(s) of the 1930's (just before FDIC was created). Not sure how much, but my grandparents lost quite a bit of money when a local bank failed. She related that many (probably all) folks were very upset about this.

Then, she related that many folks spent a lot of time, energy and frustration about the financial losses from bank failures- which accomplished nothing - just a lot of wasted energy and time. She then related that my grandfather said something like - "The money is gone. We will move on and spend time, effort and energy on productive things." They were farmers - so no shortage of work to be done.

I suppose one aspect of "Wisdom" is knowing or deciding when to fight and raise hell and when to move on to productive effort - similar to this https://youtu.be/Utw30CKnATA

User avatar
Topic Author
danielc
Posts: 535
Joined: Sun Dec 10, 2017 4:48 am
Location: Pennsylvania, USA
Contact:

Re: Question about FDIC insurance

Post by danielc » Sat Dec 29, 2018 3:18 pm

typical.investor wrote:
Sat Dec 29, 2018 11:45 am
FDIC-87-36
November 9, 1987
Alan J. Kaplan, Counsel
Your October 7, 1987 letter asks whether the full faith and credit of the United States Government stands behind the Federal Deposit Insurance Corporation and its deposit insurance fund. You noted that in my earlier letter to you, dated August 26, 1985, I stated that a joint resolution of Congress (H.R. Con. Res. 290) adopted in March 1982, which reaffirmed that the United States pledges its full faith and credit behind the federal deposit insurance funds, may have served as a moral pledge on the part of Congress to support the deposit insurance funds should they ever need it, but, because of its status as a non-binding resolution, did not serve to create any legal liability on the part of the United States Government to support the funds. You now ask whether Congress has passed a statute that makes the United States Government legally liable for any and all obligations of the FDIC.
Title IX of the Competitive Equality Banking Act of 1987 ("CEBA"), signed into law by President Reagan on August 10, 1987, provides:
TITLE IX–FULL FAITH AND CREDIT OF
FEDERALLY INSURED DEPOSITORY INSTITUTIONS
SEC. 901. REAFFIRMATION OF SECURITY OF FUNDS DEPOSITED
IN FEDERALLY INSURED DEPOSITORY INSTITUTIONS.
(a) FINDINGS.--The Congress finds and declares that--
(1) since the 1930's, the American people have relied upon Federal Deposit insurance to ensure the safety and security of their funds in federally insured depository institutions; and
(2) the safety security [sic] of such funds is an essential element of the American financial system.
(b) SENSE OF CONGRESS.--In view of the findings and declarations contained in subsection (a), it is the sense of the Congress that it should 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.
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 $3.0 billion from the Treasury remains unchanged.
Based on that, specifically the view that the Attorney General has a say, and current events where the Attorney General isn't exactly independent and replaceable if their views differ than their boss, it does seem that treasuries offer more security.

I mean as a pure legal matter, if the FDIC was in trouble and a US President didn't want to fund it, it would seem the US President if desired could place an Attorney General into office who would take the view that it isn't a Federal responsibility. Whether or not courts would agree would seem another matter, but would likely take a long time to resolve.

Thank you. That was extremely informative. That text you copied and your explanation really provide the nuance that I was looking for. One way to summarize it would be that (1) The FDIC can borrow from the Treasury up to some limit, and (2) beyond that, Congress has affirmed a kind of moral but not legal obligation to fund the FDIC if needed, though the final say lies in the Attorney General and the courts.

I think that covers everything. Thanks for taking the time to dig through all these details.

User avatar
JoMoney
Posts: 6629
Joined: Tue Jul 23, 2013 5:31 am

Re: Question about FDIC insurance

Post by JoMoney » Sat Jan 12, 2019 9:16 pm

I wonder how unified and quickly they would be if it got to the point congress had to actually formally act to appropriate money to bail out FDIC.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Call_Me_Op
Posts: 7176
Joined: Mon Sep 07, 2009 2:57 pm
Location: Milky Way

Re: Question about FDIC insurance

Post by Call_Me_Op » Sun Jan 13, 2019 8:18 am

JoMoney wrote:
Sat Jan 12, 2019 9:16 pm
I wonder how unified and quickly they would be if it got to the point congress had to actually formally act to appropriate money to bail out FDIC.
Pretty quick, I would think, if you consider the consequences of allowing grandma to lose her life savings tucked away in that bank CD.
Best regards, -Op | | "In the middle of difficulty lies opportunity." Einstein

User avatar
LadyGeek
Site Admin
Posts: 50409
Joined: Sat Dec 20, 2008 5:34 pm
Location: Philadelphia
Contact:

Re: Question about FDIC insurance

Post by LadyGeek » Sun Jan 13, 2019 9:05 am

This is a "no politics" forum. An off-topic post was removed. As a reminder, See: Politics and Religion
In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
Please stay focused on the investing aspects.
Wiki To some, the glass is half full. To others, the glass is half empty. To an engineer, it's twice the size it needs to be.

Van
Posts: 598
Joined: Wed Oct 27, 2010 9:24 am

Re: Question about FDIC insurance

Post by Van » Sun Jan 13, 2019 9:14 am

Thanks so much for starting this thread. With a very substantial portion of my portfolio in CDs, I was sleeping soundly thinking the principal was rock solid safe. Now I'm not so sure.

User avatar
nisiprius
Advisory Board
Posts: 37382
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: Question about FDIC insurance

Post by nisiprius » Sun Jan 13, 2019 10:01 am

On the one hand, I personally experienced an NCUA handling of a failed credit union, and at about the same time a colleague experienced an FSLIC handling of a failed savings and loan, and both of them were practically non-events. One sign on the door Friday, different sign on the door Monday.

The best way I can quantify it is that the disruption caused by these events was less than the disruptions I experienced later--in the wave of consolidations following repeal of Glass-Steagall--when a regular bank I had an account in changed name and identity three times in about ten years, as a result of successive acquisitions by successively large banks.

So the deposit insurance systems are there, they are used routinely all the time, they work smoothly.

On the other hand, black swans are by definition unpredictable. Nobody knows what would happen precisely in a crisis situation so extreme that the FDIC and Treasury were severely strained.

I do not think "full faith and credit" is a conscious deception and that there is sneaky language, crossed fingers behind the back. In an unprecedented crisis I don't think the FDIC would just stand back, chuckle, and say "nyaaah, nyaaah, fooled ya." What would really happen is that everyone involved, banks, FDIC, Treasury, Congress would start improvising, trying to figure out what resources they had and what they could do, and how far their authority went, and whether they could exceed their authority and apologize later.

If a government agency doesn't have the resources to do what they are supposed to do, then not everything they are supposed to do will get done. They will prioritize. "Full faith and credit" is a signal that they are supposed to give it pretty high priority. What more can you say than that?

I mean, look at the shutdown. It's not duplicating what happened in earlier shutdowns. People in government agencies are improvising, "maybe I can move money from point A to point B and the money will move, even if I get told later it was illegal." Could you have predicted, prior to the shutdown, which services would limp along and which would actually stop?

Analysis of subtle legalisms isn't going to get you much of anywhere. For example, before the S&L crisis, there was some subtle difference that suggested that FSLIC did not make as ironclad a promise as FDIC. This was mentioned quite a bit. If I recall correctly, FSLIC did not say it was backed by "full faith and credit"--but in the event, it worked fine.

In short, you just don't know.

By definition, there is no map for uncharted territory.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

Post Reply