The FDIC covers up to $250k for each account. It does so using a fund that's about $50b, for a depositor liability of around $5t. If you do the math, that means around 1% of depositor liabilities are covered. There are over 5000 institutions covered, however JP Morgan Chase holds around $1t in deposits (20%), BofA holds around $2t (40%) and then the rest is divided up in the long tail of decreasing market share.
This means that, if for instance BofA or JP Morgan Chase fails (that'd never happen, right?) that the liabilities alone of these banks are already 20x to 40x bigger than the entire FDIC fund.
This means that, if for instance BofA or JP Morgan Chase fails (that'd never happen, right?) that the liabilities alone of these banks are already 20x to 40x bigger than the entire FDIC fund.
Note: If BofA or JP Morgan Chase went bankrupt, it wouldn't necessarily mean that they have zero assets. More likely they'd be able to pay 99 cents on the dollar and the FDIC would pay the last cent.
"More likely they'd be able to pay 99 cents on the dollar and the FDIC would pay the last cent."
How long would that take take and what about the overheads of winding up a bank? Also, what about the ranking of different kinds of creditors - depositors would only be kind of creditor if a bank was wound up?
Actually, what the FDIC does is give the small depositor some confidence that his money will be there, even if the ban fails. This reassurance is enough to keep him from running to the bank when ever he is scared and pulling out all of his money and putting it under a mattress or something. At this, it is quite effective (even during the mortgage meltdown there were no large groups of withdrawals at banks by retail depositors).
FDIC is backed by the full faith and credit of the US government. This makes the holdings of the fund itself irrelevant -- if BofA fails, Congress will make the depositors whole with Treasuries.
Exactly. The only reason to be afraid of that is if you have zero faith in the Dollar and thereby the Treasury/US government. And while I can somewhat empathize with the sentiment, if the US government collapses, we have bigger fish to fry here in the US.
Why would the FDIC need a $50b fund, if it's backed by "the full faith and credit" of the US?
They wouldn't need any funds at all. Whenever they needed money, they'd just ask the Fed.
So, what's the $50b for, really? Or maybe, "full faith and credit" doesn't really mean what you think it means, maybe it means: "full faith and credit... maybe, in the meantime use this $50b fund while we make up our mind"
It's set up as an insurance to which the banks pay premiums to cover the losses. The $50B fund exists to prevent the american public from having to step up every time, however, it is backstopped by full faith and credit.
I actually think that if the government collapses, the FDIC is the absolute last thing to fail. Every politician understands how much of a political suicide it would be to directly fail the voters so they lose something they own in a very personal way. (As opposed to the typical government malfeasance, where the losses come from large, impersonal pools.)
If government were to collapse, I expect the last thing that the politicians would be concerned with would be the FDIC. First thing in their minds would be how to spin this so they don't end up on the business end of a militia firing squad.
No, you are being dramatic. Big banks don't fail when they have no assets. They just fail when they become insolvent. They will still likely have all of their deposits to meet the capital reserve requirements. It's when they get caught with illiquid assets that they fail. Look at the 2008 financial crisis and the banks that failed. There was nobody that got short changed that had a regular bank account.
If one of the too big to fail banks fails, and isn't bailed out, depositors are gonna get Goxed.