The FDIC limit has been raised to $250,000 which is a good thing. The increased limit is only a temporary measure (through Dec 31, 2009) but hopefully it will be extended before it expires. I don’t see anything magical about $250,000 but something like $200,000 (or more) seems reasonable to me. The coverage level was increased to $100,000 in 1980.

What does federal deposit insurance cover?
FDIC insurance covers funds in deposit accounts, including checking and savings accounts, money market deposit accounts and certificates of deposit (CDs). FDIC insurance does not, however, cover other financial products and services that insured banks may offer, such as stocks, bonds, mutual fund shares, life insurance policies, annuities or municipal securities.

Joint accounts are covered for $250,000 per co-owner. The limit is per person, per institution, so all your accounts at one institution are added together. If you have $200,000 in CDs and $100,000 in savings you would have $50,000 that is not covered.

FDIC is an excellent example of good government in action. The Federal Deposit Insurance Corporation (FDIC) was created in 1933 and serves to stabilize banking by eliminating the need to get ahead of any panic about whether the bank you have funds in is in trouble (which then leads to people creating a run on the bank…)

From an FDIC September 25 2008 news release: the current FDIC balance is $45 billion (that is after a decrease of $7.6 billion in the second quarter). The FDIC is 100% paid for by fees on banks. The FDIC can raise the fees charged banks if the insurance fund needs to get increased funds.

In the event the FDIC needs emergency funds they can borrow them from the treasury department to meet obligations and then the FDIC would pay back those loans using fees charged banks (as well as from sales of assets of failed banks that the FDIC took control). They have done this one time in the past, in 1990. They paid back the treasury with interest within 2 years.

The new law (passed Oct 3rd) increased the limits temporarily to $250,000 but seems to indicate taxpayers will fund any losses between $100,000 and $250,000 (and premiums would not be charged to banks on these assets (I believe). I hope they change this to have the FDIC insurance pay for itself, as it has always done previously.

The FDIC aims to keep the insurance fund at between 1.15% and 1.25% of total deposits. Currently it is at 1.01%. So premiums the banks pay will be increasing. Premiums charged banks in 2007 averaged 5.4 cents for every $100 in insured deposits. Troubled banks pay higher premiums as the FDIC moved to risk weighted premiums somewhat recently (last 5-20 years, I think). In 2008 the fund will have gross income of about $5 billion ($2.5 billion in fees from banks and $2.5 billion in interest).

Related: Investor Protection Needed - Where to Keep Your Emergency Funds? - Sneaky Fees - Some Movement on Regulating Credit Cards Companies

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