Last week the American Banker, the daily newspaper for the banking industry, published an article by Professor Mark Williams, a Boston University lecturer and Federal Reserve Bank examiner. Professor Williams has determined that the current federal deposit insurance coverage of $250,000 per customer is too high. He contends that, while that level was appropriate during the recent financial crisis, it should now be rolled back to $100,000 per customer.
His mathematical justification is that, when FDIC coverage was instituted in 1934, coverage was only $2,500. Future-valued to today, that level would be $45,000. Was coverage of $2,500 the right level in 1934? Apparently not, because six months later, the amount was doubled to $5,000 per account. The wise professor has determined that, even at the higher adjusted level, the future-value today would be $86,000 — still well under his proposal of $100,000.
The author’s reasoning to support this premise has several components. First, he states that when the dollar size of bank failures exceeds premiums collected, then government and taxpayers become the only remaining backstop. Second, he argues that few depositors have the need to use the entire $250,000 in protection, so this program benefits only banks and their wealthiest customers. Third, Williams asserts that insurance premiums have not increased sufficiently to pay for this level of coverage and would more appropriately support a $100,000 insurance limit.
I respectfully disagree with the professor. His math may be correct, but he is assuming that the coverage extended in 1934, after being doubled to $5,000 per customer, was accurate. I would counter that perhaps we need the hindsight of years of experience to assess what the initial level ought to have been. Keep in mind that in 1980, after 40-plus years of experience, officials were motivated to increase the level to $100,000 — they may have pegged it correctly. If so, the current level of $250,000 is actually a little low.
Williams’ three lines of reasoning in support of his opinion can likewise be debunked. He is concerned that only the government and taxpayers can stand behind the guarantee when losses exceed collections. Not true! The concept of insurance is that premiums are collected both in good times and bad, so that ample reserves are set aside to pay claims during the bad times. I find it offensive that Professor Williams failed to disclose that depository financial institutions, which borrowed only twice in the FDIC’s 80-year history, have always repaid in full. There has not been a single penny of taxpayer money provided to the FDIC — not in the so-called savings and loan crisis nor during TARP funding. Every penny was paid back by the banks which enjoy the coverage.
His second reason was that few depositors have $250,000, and therefore the coverage helps only banks and their wealthiest customers. Every depositor has coverage up that their balance or the $250,000 limit. I expect the protection is equally important to the depositor with $10,000 as to the one with $250,000. Plus, many of the larger depositors are not individuals, but small businesses which employ people who become taxpayers. The security afforded these businesses help support their growth and increased hiring of even more people who become taxpayers.
The professor’s last reason dealt with the premiums being too low to support $250,000 in coverage. Again, his lack of understanding of the concept of insurance is astounding. The fund has covered all of its losses and operations of FDIC, while growing the fund back to a positive balance, with 0.32 percent coverage on the legislated goal of 1.35 percent. This growth occurred very shortly following the period of the largest losses to FDIC since its inception. Seems actuarially sound to me!
Let’s keep FDIC coverage at the $250,000 limit and do some fact-checking before heeding advice that ultimately could do more harm than good.