February 23, 2016
Last week the FDIC released its annual financial statements, giving the public a glimpse into the financial condition of the organization responsible for backing up the entire US banking system.
The numbers are pretty incredible.
The FDIC maintains the Deposit Insurance Fund (DIF), which is the emergency stash for nearly all bank deposits in the Land of the Free.
DIF financial statements show an incredible 54% drop in cash equivalents since last year.
This means the DIF’s immediate liquidity is now just 1.2% of its total assets. In other words, nearly 99% of the insurance fund is tied up in various investments that may lose substantial value in the very financial crises that they’re meant to insure.
The FDIC has stuffed much of the DIF funds in an expanding bond portfolio. Yet by its own admission, this portfolio is down $10 billion, or roughly 14%.
Plus, a good chunk of that bond portfolio has been invested in securities that earn negative interest.
It’s incredible; the organization insuring the US banking system has actually purchased bonds that yield negative interest!
Now, including the losses, the fair market value of the DIF is about $62 billion.
That might sound like a lot of money. But total bank deposits in the US exceeds $13 trillion, according to the Federal Reserve.
This means that the DIF has net assets available to cover less than 0.5% of all bank deposits.
In fairness, the FDIC’s insurance fund doesn’t need to maintain a 100% cash backing of all bank deposits; that’s not how insurance works.
If your home is covered against fire damage for $300,000, the insurance company won’t set aside $300,000 specifically for your home.
Their actuarial tables suggest that the risk of loss is much less than 100%. So they’ll only set aside a fraction of that amount.
And admittedly, the risk of a 100% loss in the banking system is almost zero. They don’t need anywhere near $13 trillion to properly insure it.
But even the FDIC itself acknowledges that their insurance fund is totally insufficient.
For starters, the fund doesn’t come close to meeting the minimum legal reserve requirement that was established by law following the Global Financial Crisis several years ago.
Even more, the FDIC states in its own report that they need TWICE the current reserve balance as “the minimum level needed to withstand future crises of the magnitude of past crises.”
Bottom line, the FDIC has stated in black and white that they are not equipped to deal with another bank crisis.
This is where the government is supposed to come in, with an explicit guarantee to bail out the banks.
The real irony, of course, is that the government doesn’t have any of its own money. They only have your money. Taxpayer money.
So in essence, the government is guaranteeing your bank deposit with your own money. It’s mind boggling.
The larger problem is that the government hasn’t done a good job hanging on to any of your money.
With the Treasury Department’s financial statements showing the US government’s net worth at negative $60 trillion, Uncle Sam is in no position to bail anyone out.
Deposit insurance may have been a well intended idea. But the hard facts show that this blanket guarantee of bank safety is ultimately a ruse.
None of the institutions involved has the financial resources to back up their promises.
So instead of blindly depositing money in a dangerously illiquid banking system and expecting an insolvent government and undercapitalized insurance fund to fix everything, a rational person ought to consider other options.
There are other jurisdictions in the world (like Norway) where the banks are far more liquid and more capitalized, backed up by well-capitalized insurance funds or governments with minimal net debt.
Holding physical cash is an even easier option to reduce this banking system risk; just make sure to avoid high-denomination notes like 500 euros or $100 bills.