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FIRE: Uninsured Deposits are ACTUALLY Insured? (FDIC)

The truth about FDIC coverage on uninsured deposits.


Let's keep this really simple.


Bank deposits in the United States are insured up to $250,000 per individual/company/bank.


So in other words, if you spread out your $1 million of cash across 4 banks, you theoretically will not experience any losses in the event that all 4 banks fail.


So what happens if you just leave the $1 million at one bank and only have $250,000 of coverage when a bank fails.


Technically, you are not insured for the $750,000 above the FDIC-insurance limit, so the FDIC is not directly liable for reimbursing this excess amount.


But that does not mean that your $750,000 is immediately lost.


What happens is that the FDIC takes over the bank, sells all of their loans/other assets, and then returns all of the money collected from the sale to the uninsured depositors.


So it is possible that even without full FDIC coverage, you are actually fully covered anyway if a bank's assets (after other debt holders are paid) exceeds the amount of the uninsured deposits.


On top of that, it is simply a bad look for the FDIC to let any depositors lose money - insured or not.


This can lead to a general market fear the disrupts the financial world.


Not buying it?


Since the 2008 failure of IndyMac, the FDIC has not let uninsured depositors lose a dime.


FDIC’s now well-established practice of protecting uninsured depositors when bank failures resume is unknown at this time...
The FDIC can protect uninsured depositors when doing so can be justified under the statutory least-cost resolution test. Given the highly subjective estimates that must be factored into this test, the FDIC apparently can justify protecting uninsured depositors in most failures.

Reference


This is also a self-serving, unspoken policy.


The FDIC does not want depositors filing lawsuits & complaints against them for not properly regulating/watching over these institutions.


In fact, national banks are not only regulated by 1 but 3 separate agencies (OCC, FDIC, Fed) - so when a bank fails, it puts the entire regulating system in question.


The numbers don't lie either


The post-IndyMac resolution experience has been starkly different. Since IndyMac, there have been 522 failures, excluding Washington Mutual. Although its uninsured depositors suffered no loss, it has been excluded from the following data because its enormous size would distort the pre- and post-IndyMac contrast that is being drawn.

Since 2010, there have been 212 bank failures in the United States (per FDIC reported: "Failed Bank" List.) Also to note, there are over 7,200 banks in the United States so this is 3% or less total failures over 10 years.


This is the typical verbiage for 99% of the reported failures (displayed on FDIC-website):


"All deposit accounts, including brokered deposits, were transferred to XXXX2 Bank, ("assuming institution").

Former XXXX1 Bank locations reopened as branches of XXXX2 Bank.

Your transferred deposits were separately insured from any accounts you may have already had at XXXX2 Bank for at least six months after the failure of XXXX1 Bank.


If your curious about if I went through all 212 bank failures checking for this info - yes I did and yes it sucked.


The one's that do not indicate that "all deposit accounts" (including uninsured) were paid out were still in the process of having the assets sold off (04/2019) and stated the following:


The full balance of all insured deposit accounts has been transferred to XXXX Bank, N.A.

For accounts exceeding $250,000, you should call 1-888-206-4662 to schedule an appointment with an FDIC Claims Agent.


These cases are few and far between.


They are also typically highly predictable based on Call Reporting (how banks report their financial activity data).


So if the odds of losing money on uninsured deposits are close to zero, the FDIC has an unspoken (but obviously conveyed) notion that they will never let uninsured depositors lose money anymore, then we can safely pronounce:


Uninsured deposits in the United States ARE ACTUALLY INSURED.

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