Last Wednesday, the Federal Deposit Insurance Corp. announced that the reserves of the Bank Insurance Fund had fallen below the 1.25 percent minimum level. This is the fund that protects bank deposits and reimburses depositors when banks go out of business. Yet despite the fact that the FDIC is already overextended, Congress is seeking to expand its liabilities by increasing deposit insurance.
Deposit insurance was created in 1933 in the wake of massive bank failures resulting from the Great Depression. Millions of Americans lost all their savings, contributing significantly to the length and depth of the Depression. With deposit insurance, savers were assured that they would be protected against loss on up to $5,000 per account - equivalent to about $60,000 today. Over the years, the maximum amount of deposits protected by insurance has risen to $100,000. It is estimated that this is sufficient to cover 99 percent of accounts. Moreover, the average amount of money per account is only about $6,000 and the median value is just half that. In other words, half of all depositors have $3,000 or less in an insured account.
Furthermore, it is important to remember that deposit insurance applies to single accounts in individual banks. Consequently, someone can have an unlimited number of accounts in different institutions all covered by deposit insurance. It is relatively easy for any depositor to have even millions of dollars of deposits covered by federal insurance if they want it.
