Except that there've been rumors swirling regarding the FDIC's solvency for a while now. People no longer confident in the government's bailout ability would be comforted to hear there's an option where much more of their money will be physically retained.
Not that the government will let the FDIC fail. They'll just inject new money endlessly to prevent it.
The FDIC isn't letting the bank fail. Quite the opposite. The FDIC stepped in and stopped the bank from failing. Otherwise, the bank's deposits would have been completely wiped out the other day.
Not "probably". The government is the ultimate backer of the FDIC and would be obligated to step in if FDIC were somehow unable to cover its obligations.
Landlord walks away, bank eats the loss, FDIC steps in if the bank mismanaged the risk and fails. Is FDIC going to fail? Obviously not, the government and central bank will not fail.
The FDIC is unlikely to fail. After all, as long as there is no major credit crunch (de-leveraging), money simply moves from one bank to another, and insurance premiums are collected regardless of where the money is located, money (and MTM short-falls) can be absorbed to big banks. Big banks, Fed and FDIC can work together to sort things out like this time.
Additionally, the dollar is merely a piece of paper, and the FDIC essentially guarantees pieces paper with $250,000 or whatever face value printed. There may be intricate mechanisms at play, such as the FDIC issuing bonds which the Federal Reserve subsequently purchases, or the Fed buying Treasury securities and providing the proceeds to the FDIC in the form of loans or capital injections. Or Fed directly offers credit line with failing banks. It is difficult to envision any issues the FDIC could encounter that could not be effectively addressed by the Federal Reserve essentially printing more money.
The value of US dollar is all about confidence, in the event of failing of FDIC, it is a testing moment of the confidence of USD. Although forced to print a lot more money could be bad for confidence, but not that catastrophic as FDIC failing.
They can run out of funds but the taxpayer will bailout the FDIC. The FDIC has a pool of money that comes from fees they charge the banks. Currently I believe there is around 100 Billion left.
There is no legal obligation for the government to step in. If the FDIC runs out of money, it runs out of money. Everyone expect that IF that were to happen, then Congress would step in and provide legal authorization for the FDIC to use treasury funds, or whatever other scheme is chosen for backing the FDIC's obligations. Because presumably in that situation letting the FDIC fail would be a far worse outcome. But this is not how things are required to play out, with existing legal authorizations. It's just speculation.
Right now, according to the law, if the FDIC rainy day funds run out there is no further source of funds to bail out banks.
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.
What the hell else are they supposed to do with the assets that are left in the bank? Giving them to the people the bank owed money makes a lot more sense than lighting them on fire or whatever. Do people think that the FDIC/government funds end up being a significant portion of the money that goes to the depositors or something?
Here’s a question for those more knowledgeable: if bank runs continued through June and Congress can’t agree on the debt ceiling (which they won’t), thus causing a government default, does FDIC cease to function?
reply