Issue 135 FDIC reform!? August 5, 2013

Have you ever heard of a Re- Insurer? It is a concept that Conservatives came up with as an alternative to the current Federal Deposit Insurance Corporation (FDIC) current form of bank insurance. Basically, this change would be used to save money in the event of a financial crisis like the one that started back in 2007. Let's get started.

What is the FDIC: Created in 1933, the FDIC is a quasi government agency that protects all bank accounts in the United States in the event of financial crisis. They insure that each account is covered so that if you loose money due to a financial or bank collapse you will still have money so as to prevent you falling into poverty. Interesting to note is that you do not have to be a United States citizen, or be a resident of the U.S. to have your money insured as the FDIC protects depositors who deposit money in U.S. banks, and only that. If your bank should fail the FDIC insurance will insure up to the first $250,000 with only a few exceptions getting more depending on how they deposit their money. The FDIC also has a role in managing failed banks helping to ease the transition of failure or even being bought out.

Current: Right now however, traditional insurance companies have take over much of the role of the FDIC. During the financial crisis, they provided money to banks that were failing to prevent their collapse while insuring the money of the banks depositors. In some instances protecting (insuring) more money than the FDIC's $250,000 limit. During the financial collapse however, some of these private insurance companies ran out of money (some of them even had the money they were sending out insured as well). Once they ran out of money, the banks collapsed despite the FDIC stepping in to help. This is where the idea for change came in.

The change: It was felt that these private insurers did a better job at keeping these banks open and may have contributed to preventing a worse situation during the financial crisis. So the idea was to have the FDIC switch from insuring bank accounts, to insuring a banks private deposit insurance companies instead who would only access the money in a financial collapse and they ran out of money themselves. Thus the creation of the term "re-insurer" to provide financial backup to insurance companies that run out of money. Basically, it help keep the government from having to bail out individual accounts and even getting involved until it is absolutely necessary while having the private insurance companies protect peoples accounts first. As to whether traditional FDIC insurance being necessary in this new role is questionable as private companies tend to be more efficient at cost savings, have a penchant for innovation and generally provide better benefits and do a better job. So it is imagined that the old form of insurance would disappear.

Conclusion: The financial crisis hurt everyone back in 2007 and is still impacting us even today. It is believed that if this new concept was implemented at the governmental level (depends on which political party or ideology you talk to) that more banks would have been saved and less people would have lost their money (both rich and poor). So from my perspective it is a concept worth investigating further to see if it can help protect us from a future financial collapse.