“There is no safer place than a bank for your money” said F. D. Roosevelt during the Great Depression. The recent wave of bank failures – of such entities as IndyMac, Washington Mutual, and Wachovia – added further doubts about the already poor financial climate. Is my money therefore safe? Thanks to the guarantee provided by the Federal Deposit Insurance Corporation (FDIC), the answer is fortunately yes.

On Monday, January 26th, we invited Lori Honjiyo, Counsel Senior Litigator in the FDIC San Francisco Regional Office, to talk about the recent bank failures and deposit insurance. We all know the FDIC by name but this was the occasion to get an insider’s point of view on the multi-billion government bail-out plan (TARP Act) and discover the full role of this agency.

Lori Honjiyo’s speech was not only comprehensive but also easy to understand for non-financial experts – giving concrete explanations on what really happens when a bank fails and the FDIC’s work to pay depositors back as fast as possible.

“In the beginning, there was no FDIC”
The thousands of bank failures that occurred during the Great Depression led newly elected President Franklin D. Roosevelt’s administration to establish deposit insurance. The FDIC was thus created in by the Banking Act of 1933 to restore public confidence in the banking system. Today, the FDIC is an independent agency and its $45 billion insurance fund is financed by member financial institutions and from earnings on investments in U.S. Treasury securities.

Crisis and bank failures
The savings and loan (S&L) crisis in late 1980s was the next great stress to the financial and banking markets to which the FDIC rose to the occasion to contain and mitigate the impact of thrifts and commercial banks failures. During this time period the Resolution Trust Corporation (RTC) was also created to handle the resolution of failing savings and loans and dispose of their assets. After resolving 747 S&L’s with $403 billion in assets, the RTC sunsets in 1995 marking the end of the S&L crisis.
The S&L crisis was followed by a period of prosperity with the development of the credit card market and the multiplication of financial corporations.

From June 2004 through early 2007 the country experienced the longest time period in history with out a bank failure. Then the number rose from 3 in 2007 to 25 in 2008. Since October 2000, the average number of bank failures has been between four or five a year. In 2009, it is one per week. Despite the large wave of bank failures resulting from the collapse of the housing market and the liquidity crisis, there is no comparison with what happened in the 1930s.

Follow up:

What happens when a bank goes out of business?
The FDIC is a regulatory institution: the “open bank” side of its activity consists of regular monitoring of banks conducted by the FDIC field offices through out the country as well as permanent onsite officers in the larger bank corporations. The FDIC has separate enforcement powers that it can exercise against open institutions. These powers are used on rare occasions to implement corrective measures to improve the health of the institutions. In most cases, where such measures are necessary the parties agree with the FDIC and stipulate to such proposed corrective orders. For those institutions that do not agree with the FDIC’s findings, there is a judicial process afforded to them so they may have their day in court and chance to be heard.

When monitoring and oversight is not enough and a bank is headed toward failure, the FDIC will intervene. This is the “closed bank” function that the FDIC also fulfills. Prior to the failure of the bank, the FDIC and other relevant regulators coordinate to seek the least disruptive way of closing the bank. On the actual day of failure, which is often on a Friday, the FDIC team comes in and over the weekend calculates what is insured and what is not. A bank going out of business will not necessarily disappear: healthy banks can take over its assets (agencies, deposits or liabilities) or the whole corporation. In this case the failed bank re-opens on the following Monday as a branch of its buyer and the customers continue on without harm. Several recent bank failures were thusly resolved: WaMu, bought by JPMorgan Chase; Countrywide by Bank of America; Wachovia by Wells Fargo.
The worst scenario is when a buyer can’t be found such as was the case with IndyMac. The FDIC pays out insured deposits from its own fund. In all cases, the keyword is fast action.

The liquidity crisis of 2008
To respond to the 2008 financial crisis, the Emergency Economic Stabilization Act – commonly called the bailout – was voted on October 3rd, and created a $700 billion Troubled Assets Relief Program (TARP) to purchase failing bank assets. Moreover it increased the amount of the FDIC’s deposit insurance from $100,000 to $250,000 until December 31, 2009.

The FDIC also adopted the Temporary Liquidity Guarantee Program (TLGP) on October 13th to resolve the Credit Crunch by encouraging liquidity in the banking system. 6,900 banks – including GE, Bank of America or Citibank – have enrolled in the program, which guarantees interbank loans. As of January 13, 2009, 6,700 banks have opted in and are participating in the program which guarantees full insurance coverage for payroll accounts. This program is financed by the Treasury and the Fed, and imposes no cost on the taxpayer or the FDIC fund. The public can check on the FDIC’s website to see which banks have opted into the TLGP programs.

The FDIC’s tips: Check how safe your money is
In these troubled times, it is natural to have questions on your bank’s liability and guarantees. Remember that the FDIC’s deposit insurance now covers at least deposits of $250,000 or less at the same insured bank or savings association. This deposit increase will continue until December 31, 2009.
- Check if your bank is insured on fdic.gov
- Use the FDIC’s Electronic Deposit Insurance Estimator (EDIE) to calculate to what extend your deposits are insured on myfdicinsurance.gov

A special thanks to Lori Honjiyo for her great insight on the crisis; and to our generous host, Union Bank of California.

Written by Pierre Letoublon