Put another way, should the Federal Deposit Insurance Corporation face liability without limit? Since the FDIC is funded by Taxpayer money, that question really becomes, should Taxpayers face liability without limit to protect everyone's savings deposits? These and similar questions are explored by Tom Petruno in "Market Beat/Deposit Insurance Limits Make Sense--At Least in Principle" (Los Angeles Times Online, Saturday, July 26, 2008).
Almost, it seems, to address an issue raised in another post in this space, namely, that the "authority" of recent actions taken by the FDIC did not seem entirely clear, it is reported in the linked newspaper column that since 1991, a Federal Statute has required the FDIC to address each bank failure "in the least costly manner to the agency's insurance fund". Reportedly, the FDIC's preferred solution to bank failures is to "merge" a failing bank with a solvent bank, which is the solution adopted by the FDIC in the post here involving reports regarding, for example, First National Bank Holding Co. of Arizona and Mutual of Omaha Bank, respectively. See id.
Since September, 2007, the FDIC has taken control of eight banks, including the now well-known IndyMac which presented the FDIC with what is reported to be the second-largest bank failure in the history of the United States. Id.
However, if one theory behind limits on Deposit Insurance is as suggested in this newspaper column, to "force individuals to be disciplined about where they put their cash," then there is a problem. Most people simply do not know how to judge which banks are solvent and which are in danger of imminent or future collapse -- until there is a bank failure or a threat of one.
The linked newspaper column includes anecdotal evidence from Britian and Japan, where the governments reportedly issued a "blanket deposit guarantee for all bank customers" or "unlimited insurance coverage" up to the total amount of each deposit. The exact workings of such plans either in Britain or in Japan are not discussed in the column. Whether such plans would have any chance of working in the United States may well depend on future conditions.
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