Increase in FDIC Limit Could Help Save Banks

I spent 18 years in the banking business, so I was very familiar with the FDIC insurance and how the limits worked with customer's deposits. In March of 1980 the FDIC limit was increased from $40,000 to $100,000 where it still stands today. We frequently worked with wealthier clients to structure the ownership of their accounts in such a way as to maximize their insurance coverage (it's actually possible to protect up to $1,000,000 for a family of four if you do it right).

This was especially helpful during the S&L crisis of the 80's when companies like the one I worked for were failing right and left. Thanks to the way we set up accounts for large depositors, and thanks to decisions from the regulators, nobody lost a dime in deposits when my S&L failed in 1985.

That deposit limit looked good in 1980, but $100,000 in 1980 dollars was worth far more than $100,000 today, and there is a push to increase the FDIC limit to help prevent bank runs:

WASHINGTON (AP) - Congressional leaders scrambled Tuesday to find enough changes to sell the multibillion-dollar financial rescue to their rank-and-file, with long-distance prodding from John McCain and Barack Obama on the presidential campaign trail.

Both McCain and Obama announced their backing for a plan that some House Republicans had pushed earlier: raising the federal deposit insurance limit from $100,000 to $250,000 in a bid to reassure nervous Americans and to shore up the economy. President Bush sought to avoid being marginalized, making another statement at the White House. "Congress must act," he demanded.

Republican House aides said the FDIC proposal might be attractive to some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings. The leadership needs to find sufficient changes to attract about a dozen more votes, the number needed to avoid the kind of stunning defeat that supporters of a bailout suffered Monday.

Obama's embrace of the idea might attract some Democratic votes.

This is a good time to do this. It may prevent nervous depositors from pulling funds in excess of $100,000 out of banks, especially if rumors about a particular bank start to circulate, whether true or not.

UPDATE: FDIC asks for temporary increase to $250,000.