Obama Proposes Raising FDIC Insurance Limit

September 30, 2008


Sen. Obama, urging reconsideration of the bailout plan, also argues that the FDIC insurance limit should be raised from $100,000 to $250,000. Mad Money host Jim Cramer also made the same point yesterday, suggesting a $1 million limit with additional fees. My colleague Josh Barro examined this issue on the blog a few days ago:

Insurance from the Federal Deposit Insurance Corporation covers most bank deposits in the United States, but only up to a limit of $100,000 per depositor, per institution. The $100,000 limit is not indexed to inflation, and has not been increased since 1980. This means that, in real terms, the insurance limit falls every year. If the limit had risen along with the Consumer Price Index since 1980, it would exceed $248,000 today.

The percentage of U.S. bank deposits that are uninsured because they exceed the $100,000 limit is nontrivial—thirty-six percent, or $2.6 trillion of $7.1 trillion total deposits, according to Bloomberg News. Many businesses require operating accounts well in excess of $100,000 in order to support daily operations, though some of the excess deposits are owned by individuals.

Normally, depositors need not worry about banking with an iffy institution, because they can rely on FDIC insurance. However, since 36% of deposits are uninsured, many depositors have excellent reason to participate in a bank run.

The deposit insurance amount is enshrined in 12 U.S.C. Sec. 1821, so it would require an act of Congress to change it. (Interestingly, a 2005 law requires inflation adjustment every five years beginning in 2010, but only adjusted from $100,000 in 2005.)

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