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Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? I know its un unlikely event but

Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.

lotsofpulp 3y ago
If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.
- JumpCrisscross 3y ago
  > If the FDIC breaks, then the whole country is broken Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties. > FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
  - lotsofpulp 3y ago
    My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes. Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago). https://news.bloomberglaw.com/daily-labor-report/biden-to-unveil-bailout-plan-for-multiemployer-pension-funds https://news.bloomberglaw.com/daily-labor-report/biden-to-un... >No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation. The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
    - deleted 3y ago
      [deleted]
    - dragonwriter 3y ago
      > The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was. Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.
JumpCrisscross 3y ago
> Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC. “FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury. [1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The%20FDIC%20receives%20no%20Congressional,pay%20for%20deposit%20insurance%20coverage https://www.fdic.gov/about/what-we-do/index.html#:~:text=The.... [2] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/#:~:text=FDIC%20insurance%20is%20backed%20by,penny%20of%20FDIC%2Dinsured%20deposits https://www.fdic.gov/resources/deposit-insurance/brochures/i....
Workaccount2 3y ago
It's funded by participating banks paying for coverage. It holds enough capital to cover something like only 2% of insured deposits. It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.
- JumpCrisscross 3y ago
  > It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event. This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.

lotsofpulp 3y ago

If the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.

JumpCrisscross 3y ago
> If the FDIC breaks, then the whole country is broken Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties. > FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
- lotsofpulp 3y ago
  My point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes. Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago). https://news.bloomberglaw.com/daily-labor-report/biden-to-unveil-bailout-plan-for-multiemployer-pension-funds https://news.bloomberglaw.com/daily-labor-report/biden-to-un... >No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation. The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
  - deleted 3y ago
    [deleted]
  - dragonwriter 3y ago
    > The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency Not really given the FDIC’s role: a threat to FDIC reserves would require the kind of broad collapse that would be produced by an economic collapse that would threaten deflation even before considering the loss of money supply from deposit accounts evaporating. FDIC coverage of insured (and even uninsured, as allowed under the systemic risk exception) amounts in such accounts can only reduce to zero the money lost from those accounts, it can never be stimulus that would go beyond neutralizing that additional deflation threat to actually deal with whatever the broader cause of the collapse was. Now, the separate fiscal and monetary response to that cause beyond preventing losses to deposits might overshoot and produce excess inflation eroding purchasing power, but that’s a separate issue.

JumpCrisscross 3y ago

> Does anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? “The FDIC receives no Congressional appropriations - it is funded by premiums that banks and savings associations pay for deposit insurance coverage” [1]. Your bank pays an insurance premium to the FDIC. “FDIC insurance is backed by the full faith and credit of the United States government” [2]. If it burns through its reserves, the Treasury writes a cheque. The reserves are a political check on FDIC’s management; most governments fund deposit insurance straight out of their treasury. [1] https://www.fdic.gov/about/what-we-do/index.html#:~:text=The%20FDIC%20receives%20no%20Congressional,pay%20for%20deposit%20insurance%20coverage https://www.fdic.gov/about/what-we-do/index.html#:~:text=The.... [2] https://www.fdic.gov/resources/deposit-insurance/brochures/insured-deposits/#:~:text=FDIC%20insurance%20is%20backed%20by,penny%20of%20FDIC%2Dinsured%20deposits https://www.fdic.gov/resources/deposit-insurance/brochures/i....

Workaccount2 3y ago

It's funded by participating banks paying for coverage. It holds enough capital to cover something like only 2% of insured deposits. It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event.

JumpCrisscross 3y ago
> It's meant to cover local contained bank failures. It won't do shit in the event of a domino collapse event. This is wrong. In the case of a large-scale collapse, depositors have a legal claim on the Treasury through the FDIC.