FDIC: Can We Hit You Back Next Year?

I came across a pretty scary story this morning regarding the Federal Deposit Insurance Corporation (FDIC). From Bloomberg:

March 4 (Bloomberg) -- Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

So, in everyday speak: “Uh, look. We promised you that the money you have your bank would be insured up to 250,000 if the bank goes under. Will you be cool if we went back on that promise?”

This is not trivial. Remember how the FDIC works. Say you have a bank account with $120,000 in it. (First of all, if you are in this situation, what are you doing?!) The FDIC will (currently) insure all of this. So if your bank fails (like IndyMac did last year); the government (usually) steps in, takes over the bank, and tries to sell the bank after writing down the losses. If the FDIC goes insolvent however, they won’t be able to pay these obligations. So your entire balance will be uninsured.

And What is the FDIC doing to meet this shortfall?

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said.

The fund, which lost $33.5 billion in 2008, was drained by 25 bank failures last year. Sixteen banks have failed so far this year, further straining the fund.

Any takers that this won’t be a “one-time” thing?

What should YOU do?

I don’t have all the answers, but what I’m doing is making sure that funds are spread across several banks. If you have a very large amount of money in one big bank, it’s best to spread it around. Even if you have a small amount of cash, stay informed about your bank's operations, especially if it's a big bank.

(Cross-posted at Swords Crossed, Facebook, and Wealth Weekly).