The Ultimate Deposit Insurer Is You
It’s read-my-lips time. Everyone wants to assure the American public that weak banks and savings and loans will be bailed out; that most deposits are insured, so they won’t lose their money, and that even if the insurance runs out, money will be found. No one need ask which institutions are “safest” and whether they should pull out their money.
A few people actually understand how the system works; they’re familiar with the FDIC, the RTC and the OTS, with the bank insurance fund and the S&L; insurance fund and their respective stability. They even know how to “structure” deposits to insure millions of dollars in a few names at a few institutions without passing the $100,000 limit.
More just respond to the promise that their funds are backed by the “full faith and credit” of the U.S. government. The derivation and exact meaning of the words in this context are obscure, but who cares? “They’re magic words,” says Monroe Price, dean of Yeshiva University’s law school. “The phrase is comforting; more than the insurance fund is available.”
Consumers do the best they can, examining an institution’s declared assets, longevity and advertising, then taking a leap of faith. “What else can you do?” asks Dona Sands, a school clerk in Los Angeles. “Put it in your mattress? I have a water bed.”
Deposit insurance goes back to the Depression, which made it clear that something had to stand behind bank deposits. To bolster public confidence in the banking system, in 1933 the Federal Deposit Insurance Corp. was established for banks and a year later the Federal Savings and Loan Insurance Corp. for S&Ls.;
For almost half a century, these funds generally grew, increased by premiums and interest income. Premiums stayed low, thanks to the health of the funds and the industries--8.3 cents per $100 in deposits until quite recently. And to inspire more confidence and larger deposits, coverage climbed from FDIC’s $2,500 in 1934 to $100,000 in 1980.
The confidence part worked fine. Depositors rarely made runs on failing institutions. No one (read our lips) has lost any insured deposits.
But then, the system wasn’t tested much--until the recent flood of failures. Many were nobody’s fault, their causes “economic,” attributable to mortgage defaults and soured real estate loans, to interest rate trends that made lenders pay more for deposits than they earned on old loans. Others were somebody’s fault, usually some headlined high-rolling executives using their S&L;’s funds for high life and projects less safe than home loans.
By the end of 1986, the FSLIC was in what S&L; regulators call “a negative position,” with “minus” $6.3 billion dollars, and by 1989, it was minus $74.9 billion. In 1988, even the FDIC insurance fund sank from $18.3 billion to $14 billion.
More than confidence was eroding. In 1989, the government shook up the system, creating a new Office of Thrift Supervision (OTS) to regulate S&Ls;, burying the very dead FSLIC and starting a new Savings Assn. Insurance Fund, to be administered by the FDIC along with the Bank Insurance Fund (BIF).
The remains of any previously failed S&Ls; went to the FDIC to sell off or parcel out along with insurance payoffs. Any failing or in danger of failing thereafter would go to the new Resolution Trust Corp. (RTC), which--funded with $50 billion from Congress--could operate it as a conservatorship, or, like the FDIC, sell it off wholly or in part, or dissolve it, paying out insurance on covered deposits.
Whatever the institution or agency involved, says RTC spokesman Nancy Schertzing, the FDIC and RTC “are required to go with the least costly resolution option.” That judgment, says FDIC spokesman David Barr, includes consideration of “the effect on the community, which may have fewer banks to serve it.” Furthermore, selling an institution saves all deposits, not just the three-quarters protected by insurance.
It also saves time, for depositors. With a conservatorship, or a change of ownership, a bank “is usually open the next day, with no interruption in service,” Barr says. A payout, he says, could take four days.
If sustaining confidence was a prime goal, government action, and government assurances, have worked again. People have full faith that there’s insurance, and beyond that, credit somewhere: the most spectacular failures (Lincoln Savings, for one) cause no panic in the streets and minimal withdrawals.
But the insurance funds are hardly solid. The Bank Insurance Fund is expected to be $10.2 billion by year-end, or “under stress,” Barr says. The new savings fund won’t be touchable or solvent until 1992.
There are discussions of lowering the deposits covered by insurance and of further raising insurance premiums, which for banks are now more than double what they were a decade ago and for S&Ls; almost triple, and are still--at 19.5 and 23 cents per $100 on deposit--inadequate. There may be more restrictions yet on what financial institutions can do with deposited monies and fewer restrictions on the financial services they can sell.
There’s always that “full faith and credit” of the U.S. government, but if it’s the ultimate assurance for people, it’s also their ultimate loss. In its ultimate form, it’s the monies government can raise by taxing the people, i.e., what their right hand will be paying to reimburse their left.
