FDIC Banks and Crashes

The Federal Deposit Insurance Corporation (FDIC) is a government agency in the United States that provides insurance coverage for deposits made by individuals and businesses in banks and savings institutions. FDIC coverage is designed to protect depositors in the event that a bank fails or goes out of business. How this coverage works and understanding its applications can help when making financial decisions. So what does it really do?

The FDIC is essentially insurance to bail out the bank itself and the customers are not their primary concern. What this means is at best, if banks collapse, the FDIC would have to print 3 trillion more dollars – making your money deflated and worth so much less. Or they may only provide you with 50% of the money you had in your account, provided the account types you have are even covered. Or also possible, they can elect to only pay your money back in some other form of money, such as CBDC. What is CBDC? Excellent question!

A CBDC is a digital form of central bank money that is widely available to the general public. Central bank money refers to money that is a liability of the central bank and "Central Bank Digital Currency" (CBDC) is one type they use. In the United States, there are currently two types of central bank money: physical currency issued by the Federal Reserve and digital balances held by commercial banks at the Federal Reserve.

While Americans have long held money predominantly in digital form—for example in bank accounts, payment apps or through online transactions—a CBDC would differ from existing digital money available to the general public because a CBDC would be a liability of the Federal Reserve, not of a commercial bank. In other words, more strict control with less access. So how does the FDIC and banks tie in?

FDIC coverage is provided by the U.S. government and is intended to protect depositors' funds up to a certain limit in the event of a bank failure or closure, as we’ve covered. The standard coverage limit through the FDIC is $250,000 per depositor per insured institution and certain retirement accounts, such as Individual Retirement Accounts (IRAs), certain trust accounts and others, can have separate coverage limits being higher or lower. Depositors' accounts, up to the maximum FDIC coverage limit (typically $250,000 per depositor per insured institution) are considered protected. So depositors do not lose their insured funds on standard accounts, but what about anything outside of that? What about other assets the bank has for depositors? Retirement accounts, investment, etc.?

Turns out, the FDIC only has $128.2 billion in reserves against $23.7 trillion in assets (money) deposited. So basically 0.5%, that's one half of one percent, could actually be covered if the banking crisis happens in full scale. Meaning if 1% of the banks fail, half of the people using them are out of luck. And note that during The Great Depression (which our economic numbers are getting close to now) 33% of all banks failed.  In other words, the FDIC would only be able to cover 0.5% and 32.5% of individuals would just lose every dime they have. So what does it all look like? 

When a bank is in financial distress and unable to meet its obligations, it is often placed into receivership. The FDIC is appointed as the receiver for the failed bank. The FDIC assesses the bank's financial condition, its assets, and its liabilities. This evaluation helps determine the extent of the bank's insolvency and the impact on depositors. In many cases, the FDIC arranges for the purchase and assumption (P&A) of the failed bank by a healthy financial institution. The healthy bank takes over the failed bank's deposits, loans, and some of its assets. Uninsured deposits and certain other liabilities of the failed bank are generally NOT covered by the FDIC.

These creditors may receive partial or no repayment, depending on the available assets of the failed bank. If a P&A transaction is not feasible, the FDIC may liquidate the failed bank's assets. The proceeds from the sale of these assets are used to repay depositors and creditors, to the extent possible. But the area for great loss is clear and wide.

The FDIC works to resolve the failed bank's financial issues while minimizing disruptions to the broader financial system but the reality of this is that overall function can come at a great loss to the individual. After the closure and resolution of a bank, the FDIC continues to oversee the process, as it is funded through premiums paid by insured banks so this serves their interest.

Overall, the FDIC's primary goal when a bank collapses is to protect insured funds, maintain financial stability, and ensure a smooth transition to a healthy institution when possible for average holdings with a focus on the bank itself and not the individual. The FDIC's role is to maintain public confidence in the banking system and prevent bank runs or systemic financial crises, but as history has shown us it can only do so much and in our current economy that's very little . On the frontier of the biggest silent banking crisis in recent history – the FDIC’s ability to protect the public from these giants during collapse remains well below the threshold of our reality.