Q&A: Raising limits on deposit insurance

Last update: September 30, 2008 - 8:15 PM

Seeking confidence-building solutions amid financial disarray, the head of the FDIC, some lawmakers and the two presidential contenders are proposing an increase in federal deposit insurance $250,000 for ordinary bank accounts. How much will it help?

Q Why are the lawmakers and the FDIC chairman proposing it?

A The spiraling crisis of confidence "is feeding unnecessary fear in the marketplace," said Federal Deposit Insurance Corp. Chairman Sheila Bair. Allowing the FDIC to raise the limits would provide more money to banks that they could lend, and reassure depositors whose account balances exceed current limits.

Q What are the current limits on deposit insurance?

A The basic insurance amount is $100,000 per depositor per bank. Individual retirement accounts, or IRAs, held in banks are insured up to $250,000. In addition, you may qualify for more than $100,000 in coverage at one bank if you have deposit accounts in different ownership categories, such as single accounts, retirement accounts, joint accounts and revocable trust accounts.

Q How many people will be affected?

A Nobody knows exactly, said lawyer Claude Rollin. Only 1 or 2 percent of the nation's households have more than $100,000 in a bank, but the threshold can also affect middle-income people, particularly those who are retired or who have recently sold a home or business.

Q When were the limits last raised?

A Legislation enacted in February 2006 raised the $100,000 insurance ceiling on retirement accounts to $250,000. The $100,000 limit for regular deposit accounts has been at that level since 1980, when it was increased from $40,000. Taking inflation into account, $100,000 in 1980 would be worth nearly $266,000 today, according to Labor Department data.

The banking industry has lobbied for an increase in the limit. Smaller community banks said it would help them compete for deposits with bigger institutions and Wall Street investment firms.

Q If the limit for regular accounts was increased to $250,000, how would that be paid for?

A U.S. banks and thrifts are charged premiums to make up the insurance fund, which is currently at about $45.2 billion, down from about $53 billion at the end of last year. Such a large rise in the account limit would necessitate a commensurate increase in the fund, so banks and thrifts can expect to pay higher premiums. Bair already plans under the current system to propose an increase in premiums to replenish the fund.

Q What could the effect of an increase in the insurance limit be?

A "It would be helpful in calming frayed nerves," said Mark Zandi, chief economist at Moody's Economy.com. "Depositors are scared."

Q What has happened in cases where a bank closes, and people have money in accounts that exceeds the insurance limits?

A Those people essentially become creditors of the failed bank. They eventually recover some of their money, but the amount can range from 40 cents on the dollar up to a full 100. Recovery of the money can take months. When big thrift IndyMac Bank failed and was closed in July, an estimated $541 million in deposits exceeded the insurance limits, out of the total $19 billion in the bank.

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