FDIC Coverage May Add Up to a Big Loss

By Michelle Singletary

Sunday, November 4, 2001; Page H01

I was working for a Baltimore newspaper when the savings-and-loan crisis hit my town.

The city editor sent me out to interview depositors of one failed thrift. I arrived to find angry, sullen and teary-eyed customers waiting in lines that stretched for blocks. Those people -- like many of us, I would imagine -- just couldn't fathom that their money wasn't safe.

Only some of it was. Insurance then, as now, covered the first $100,000 on deposit. But if you had more in your account, as did many of those who were left out in the cold when 1,300 banks and savings institutions went bust between 1980 and 1994, there was little comfort in that insurance limit.

It has been 21 years since those limits were raised, and that's too long, according to Donald E. Powell, the new chairman of the Federal Deposit Insurance Corp.

Powell has proposed that the basic deposit insurance be tied to the consumer price index and adjusted for inflation every five years. Powell also wants to create a higher insurance limit for individual retirement accounts (IRAs) and Keoghs, which are tax-deductible retirement plans for the self-employed.

"Indexing is important because it does not erode nor dilute the $100,000 limit Congress established in 1980," Powell said in an interview. "And raising the insured limit for IRAs and Keoghs would benefit millions of Americans."

Today, with fewer bank failures, it's easy to forget that not all money parked in an insured financial institution is protected. It is true that notice of the $100,000 protection limit is plastered on the front door or window of every federally insured bank or thrift. You see it before you even see a teller. But that sticker has become like wallpaper -- you just don't notice it anymore.

Yet federally insured banks do fail, and depositors still lose money. In the past two years, 15 banks and savings institutions -- with $113.5 million in uninsured deposits -- have collapsed. The country's worsening economy makes more bank failures probable.

"We are just waking up to the fact that our current deposit insurance coverage of retirement savings is simply inadequate to support the cost of retirement in 2001," said Sen. Tim Johnson (D-S.D.), who held a hearing on the issue last week. "We must take great care to ensure that our system remains healthy and make any revisions proactively, so we don't find ourselves in the position of having to act in a crisis mode."

In July, the FDIC closed Illinois-based Superior Bank, with $65.5 million in uninsured deposits. About $7.2 million was in IRAs and Keogh plans. In one case, a Superior depositor had $3.4 million in an IRA. Only $100,000 of that money was insured. In 1999, the FDIC closed First National Bank of Keystone, W.Va., with $26.7 million in uninsured deposits.

It is probable that much of the uninsured deposits at those 15 failed institutions will be returned to account holders. But how much of their money will be returned is determined by how much the FDIC can recover, once assets of the failed institutions are sold. And that process could take years.

As a growing number of people stockpile money in tax-advantaged retirement accounts, it is becoming clear to some lawmakers that the $100,000 deposit insurance limit is pitifully inadequate to protect consumers in the event of a bank failure.

"While Congress has created significant incentives to encourage Americans to save for their retirement, we have not taken the necessary steps to let our retirees keep their life savings safe in their local communities," Johnson, the chairman of the Senate Banking Committee's subcommittee on financial institutions, said in a statement.

The last time Congress increased the coverage for deposit insurance on retirement accounts was in 1978, when the limits for IRAs and Keoghs were raised from $40,000 to $100,000. In 1980, the limit on all other accounts was also raised to $100,000.

Insured banks and thrifts are holding about $220 billion in retirement accounts, but the FDIC estimates that about $60 billion is not insured.

"Deposit insurance is an important safety net," said Fred Carns, associate director for the FDIC's division of insurance. "We ought to maintain its real value over time."

Despite a slowing economy, Powell said the insurance funds set up to protect deposits in banks and thrifts are strong. Despite some bank failures, the industry is equally strong. Powell said the time to act is now.

I agree. Yet even if the basic insurance limits are increased, don't forget that federal protection for your money only goes so far. You still have to be careful picking the institutions you trust to keep your life savings safe.

While Michelle Singletary welcomes comments and column ideas, she cannot offer specific personal financial advice. Readers can write to her at The Washington Post, 1150 15th St. NW, Washington, D.C. 20071, or by e-mail at singletarym@washpost.com.

http://www.washingtonpost.com/ac2/wp-dyn/A33780-2001Nov3?language=printer

-- Martin Thompson (mthom1927@aol.com), November 04, 2001