Robert Pozen writes "$100,000 Is Plenty for Deposit Insurance" in an Op-Ed piece in yesterday's Wall Street Journal. The article, subtitled, "Raising the cap will enhance the ability of weak banks to expand their deposit base and cause trouble for the FDIC," says, "It looks as if Congress is about to permanently increase FDIC deposit insurance to $250,000 from $100,000 per bank account. What's more, it plans to make this increase retroactive to Jan. 1, 2008, in order to protect certain depositors at Indy Mac and other banks that became insolvent before the financial crisis reached its height. This move will substantially raise the cost of resolving troubled banks, and isn't necessary to protect small depositors. The old limit of $100,000 per bank account was interpreted so flexibly by the FDIC that a family of four could easily obtain federal insurance for $600,000 by opening multiple accounts under different names.... Less than 2% of all bank accounts were above the old $100,000 limit. These uninsured accounts were not held by small depositors, but by high net worth individuals and local business people, many of whom could not easily create enough different accounts in one bank to cover their large deposits." Pozen adds, "Historically, the weakest banks have attracted a flood of deposits by advertising sky-high interest rates. These bankers typically believe that they can grow their way out of problems by investing in new loans and high-yield bonds. This practice was one of the key factors that caused the savings and loan debacle of the 1980s. By raising the maximum insurable limit to $250,000 per account, we will enhance the ability of weak banks to expand their deposit base very quickly. The result is predictable: much higher costs for the FDIC when it takes over insolvent banks."
