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0/How safe are your bank deposits? What happens during a crisis or bank run? Here’s a little story about the FDIC and who exactly is insuring whom. TL;DR in a financial crisis you fund the FDIC. Read on!
1/The FDIC insures your bank deposits up to $250K. The insurance is a pool of money collected as premiums from banks. But this pool is only a fraction of the $250K. The FDIC reserve requirement is barely over 1%. That’s right the FDIC does not have 100% reserves!
2/Pre 2008 FDIC bank premiums were fixed across the board. A risky bank paid the same as a conservative one yet enjoyed the same full “protection” from the lender of last resort.
3/Risky banks had no incentive to pare back aggressive lending practices as they made more money than their conservative colleagues. Conservative banks had every incentive to join the fray or lose market share. What could go wrong?
4/Between 2008 and 2012 the FDIC closed 475 banking institutions. More than 10X the previous 4 years. Failed banks accounted for $1.8T in deposits & nearly $70B in direct est. loss (www5.fdic.gov/hsob/hsobRpt.a…). 
5/During the 2008 financial crisis the FDIC ran out of money leading to a $21B deficit in ’09. It closed the gap by increasing bank premiums and demanded 3 years fees in advance. Where did the money come from? Bailout funds!
6/Time to fix the FDIC. Post 2008 those fixed premiums changed to reflect bank risk profiles. Also minimum the min 1.15% reserve to cover insured deposits was raised to a grand total of 2%. But baby steps! It’s 1.36%.
7/Confidence was faltering. So from 2011 to 2012 FDIC provided temporary unlimited non interest bearing deposit insurance for everyone and every entity. Deposits spiked! Which “restored confidence” and lead to even more lending, spending, & stoking the current economic boom…
8/But over the last 10 years systemic risk has grown, financial institutions are more interconnected and opaque shadow banking markets account for nearly 50% of global assets (src FSB 2017 report). Asset valuations are ATH across the board. This bubble is bound to pop.
9/The American public believes its deposits are insured. But end of 2018 FDIC insurance pool is $100B. If economic turmoil exceeds 2008, bank failures & runs will empty FDIC coffers, breaking the facade of a safe haven banking system. Maybe this time we’ll pay attention.
10/Wait, one more thing! FDIC’s 1.36% reserve = $100B cash is not real. 98% is invested in US Treasury bonds leaving a grand total of $2B = 0.03% cash coverage for “insured deposits.”
11/But there’s more! Congress has already spent the FDIC’s investment. In the next financial crisis, the FDIC won’t be able to cover its obligation. Cue Federal Reserve bailout.
Fin/That new Fed money will go to the FDIC, flow back to banks, into the economy, diluting the dollar, raising prices, shifting an FDIC bailout to the public in the form of a “secret tax” called inflation. FDIC’s insurance payout comes right out of your pocket!
