By Franklin Sanders
After the bank runs of the early 1930s one of Franklin Roosevelt’s high priorities was somehow to restore faith in the banking system. After all, this wasn’t the first time in U.S. history that a crowd of banks had failed, taking depositor’s money with them.
The scheme he invented was the FDIC, Federal Deposit insurance Corp. Here’s how the FDIC bills itself: “an independent agency of the United States government that protects the funds depositors place in banks and savings associations. FDIC insurance is backed by the full faith and credit for the United States Government.” http://www.fdic.gov/deposit/deposits/dis/
However, that’s all window dressing, like a Quaker cannon, a log carved and painted by artillery-deficient defenders to look like a cannon to deceive and scare off the enemy. The FDIC is a Quaker cannon that seeks to control panicking depositors at the margin. Think of a stampeding buffalo herd: you can’t stop them by standing in their way, but you might turn them by scaring the ones at the edge, yelling and waving your shirt.
But so far, the Quaker cannon has worked. I am amazed at folks who think their deposits — under $250,000 — are soundly insured. After the haircut given to depositors in Cypriot banks recently, the so-called “bail-ins” where the banks’ shortages were made up with funds taken even from small depositors,” it’s worth pondering the FDIC soberly.
How big is the reserve?
I found this eye-opener at http:// www.fdic.gov/ deposit/insurance/ memo_2013_03_28. pdf . In a March 28, 2013, memorandum to the FDIC Board of Directors, Arthur J. Murton, director, Division of Insurance and Research, writes,
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) requires that the Deposit Insurance Fund (DIF) reserve ratio reach 1.35 percent by September 30, 2020. The FDIC is operating under a DIF Restoration Plan that provides, among other things, that the reserve ratio will reach 1.35 percent by the statutory deadline.
The Restoration Plan requires the FDIC to update DIF loss and income projections at least semiannually, which allows the FDIC to evaluate whether growth in the DIF is likely to be sufficient to meet the statutory requirements. This memorandum is the first semi-annual update for 2013. The DIF balance has risen for twelve consecutive quarters and stood at $33.0 billion on December 31, 2012, resulting in a reserve ratio of 0.45 percent. Staff projects that, under the current assessment rate schedule, the DIF reserve ratio will reach 1.15 percent in 2018.” [Italics added.]
Ponder soberly these things:
A $33 billion reserve fund with a deposit ratio of 0.45% means that $33 billion is the reserve against deposits of $733.33 billion. Think 45 cents reserve for every $100 covered. Clearly FDIC’s strategy is not to pay off depositors, but to close sick banks quickly, sell to another bank, and make good on as little as possible. A $33 billion reserve against $733.33 billion deposit liabilities is ridiculous. In no way could the FDIC make good on widespread, systemic bank failures. It can handle a few banks at a time, only. Period.
When it failed in 2008, Washington Mutual in Seattle had assets totaling $307 billion. IndyMac in Pasadena failed the same year for $30.2 billion. Four bank failures at the same time requiring the FDIC to pay $8.25 billion [each] would exhaust the deposit insurance fund.
I am not saying that all banks in the country are about to go belly up tomorrow. However, as a matter of fact, the banks (not the FDIC) hold in reserve against all deposit liabilities amounts to less than 2% (all deposit liabilities divided by all reserves). Fractional reserve banks are, therefore, inherently bankrupt, always.
It’s just not a problem until the bank runs begin.
Speculation has abounded on the Internet that something like the “bail ins” indiicted on Cypriot depositors might be applied here. Frankly, I doubt it. The banks badly need the FDIC Quaker cannon to maintain their credibility. However, when a bank goes down, expect no mercy to be shown to depositors who have more than $250,000 in any one account.
Also, you cannot assume — as FDIC insurance wants you to assume – that all banks are equally safe. Plainly, they ain’t. You need to investigate your own bank.
Go to http://banktracker.msnbc.msn.com/banks/. There you can click on your state, then pick your city, then pick your own bank. The chart that appears will compare your own bank’s “Troubled Asset Radio” to the national median. The Troubled Asset Ratio is a measure of the nonperforming loans – loans that have gone bad.
Remember that “national median” means that half the country’s banks rank above that median level and half below. It’s not the “average.” This Troubled Asset Ratio is only one measure of bank stability, but it’s a start.
Keep this in mind: FDIC is not insurance, it’s a Quaker cannon.
Used by permission. Subscribe to the Moneychanger’s daily commentary by dropping your email address at Franklin’s website, the-moneychanger.com. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focuses on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$99 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. F. Sanders, The Moneychanger, P.O. Box 178, Westpoint, Tenn. 38486 Tel. 888-218-9226.