Mon, August 18, 2008
Industrial-Strength FDIC Insurance
The possibility of further bank failures continues to hover in the air. In a June post I explained that under the right circumstances a depositor can have funds in excess of $100,000 insured by the FDIC in a single bank. For cash-holders with serious assets, there is at least one other way to obtain FDIC insurance for really large sums.
FDIC Chairman Sheila Bair has claimed that historically, only 13% of the banks on the FDIC watch list ultimately fail. With only 90 banks on the FDIC’s list of naughty banks at the end of Q1 2008, we’re a comfortable distance from the 1,496 banks that were on the list at the height of the savings and loan crisis in 1990.
The deposit insurer is bracing for trouble, though, as it’s announced plans to bulk up its headcount. Eighty people, mostly FDIC retirees, have been added to the agency’s staff this year, and according to the NY Times, the FDIC may add hundreds to its workforce to keep up with bank failures.
Although the FDIC’s watch list is not disclosed to the public, the FDIC website does provide a list of independent bank rating firms for individuals who want to check out the soundness of their bank. Also, Bankrate.com provides no-cost data on the financial strength of most banks.
All the angst over bank stability has prompted a flurry of discussion about deposit safety. Apparently, there is significant demand for insuring sums much larger than $100K. Businessweek (among others) recently ran a story about something called the Certificate of Deposit Account Registry Service (CDARS). The service accesses a network of 2,000+ FDIC-insured banks and enables a depositor to insure up to $50 million in deposits. The depositor’s funds are broken up and distributed into CDs at multiple banks so that each bank holds less than the $100,000 limit. The service saves the depositor from having to manage paperwork for multiple banks and provides a single statement for all the depositor’s funds.
You’d think that few investors with that much cash would want to tie it all up into low-yielding CDs. Presumably there are risk-averse investors around whose cash allocations are large enough to warrant such a service. But I’d have to say that this is pretty heady stuff; a retiree (for example) who needs this must have some pretty hefty cash flow requirements. Apparently there are a lot of Americans living in Robert Frank’s Richistan after all.
Still, a burning question remains: if you put $50 million into bank CDs, what kind of a toaster do they give you?
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