FDIC Insurance Fund Dow to $10 Billion; Is Your Money Safe?

The FDIC reported today that the situation is still grim in the nation's banking sector. The number of problem banks rose from 305 to 416 and the FDIC's deposit insurance fund fell to $10 billion from over $40 billion last year. Combined, the banking sector lost $3.7 billion in the second quarter amidst a continued slump in real estate, accelerating unemployment, and increased foreclosures. Many are expecting the commercial real estate market to face significant problems, which would further strain bank's balance sheets.

At this point, one big bank failure looks like it could wipe out the FDIC's insurance fund. The collapse of Indymac cost the fund almost $9 billion alone.

So should you be worried about FDIC insuance? The answer is no. There are several reasons for this:

First the FDIC fund is not actually down to $10 billion. The FDIC has taken over $20 billion out of the insurance fund and put it in reserves in anticipation of future losses. So in essence, the $10 billion is actually a safety cushion after the FDIC is done paying with its projected payouts. $10 billion is not a large cushion though and one unexpectedtly large bank failure could still wipe out the fund. That brings us to point #2.

If necessary, the FDIC will raise more money from banks by assessing a special levy. The Deposit Insurance Fund is funded via a levy on all banks. In tough times, the FDIC can increase this levy, as it did last winter, or it can ask for a special payment from the banks. If banks continue to deteriorate, look for one if not both.

Third, the Federal government has extended the FDIC a $100 billion line of credit which can be tapped at any time. In addition, should the line of credit be used, the FDIC is backed by the full faith and credit of the US, and more money will be appropriated by Congress, assuming there is any money to appropriate.

While 2008 and 2009 have been tough years, they haven't approached the carnage of the Savings and Loan crisis in the 1990s based on the number of bank failures or the combined assets of those failed banks. FDIC has done a very good job of conserving its funds by preventing outright failures and conserving its funds by partnering with other banks and investors to sell impaired banks. This has spared the FDIC the full brunt of any deposit losses - think WaMu, Wachovia, National City, etc. Expect this kind of public/private partnership to continue.

Based on all of this, I would deposit my money in a savings account or a CD and sleep soundly at night.