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How the FDIC Cap Makes the Rescue More Effective

Posted By Conn Carroll On October 2, 2008 @ 11:57 am In Economics | Comments Disabled

Two stories in The New York Times today demonstrate why the increase in the level of deposits the FDIC can guarantee (from $100,000 to $250,000 [1]) will help address the spreading financial crisis. First, on the importance of small businesses [2] to the U.S. economy:

Small businesses in America — the 27 million companies employing fewer than 500 people and in most cases fewer than 20 people — account for half of the nation’s output. A downward swing, whether caused by expensive borrowing or pessimism, could weaken the economy and shrink employment. Small businesses employ 40 percent of the work force, the Census Bureau reports, and they outpace large companies in generating new jobs.

Now the NYT explains how the increased FDIC limits help small businesses [3]:

Proponents say that the move should help calm the nerves of depositors and stabilize the banking industry. After the emergency takeovers of WaMu and the Wachovia Corporation, bankers have worried about customers withdrawing their money.

Among the biggest beneficiaries will be retirees and small-business customers, who tend to have higher account balances. Raising the limit should help reassure depositors they do not need to withdraw their money at the first sign of trouble. It sharply reduces the risk of keeping more than $100,000 in the bank.

“It will bring peace of mind of mind to grandmother and mom and dad,” said Cam Fine, the head of the Independent Community Bankers of America, an industry group that lobbied for the increase. “My bankers are getting numerous customers coming into their lobbies and saying, ‘is my money safe?’ ”

But Mr. Fine acknowledged that potentially the biggest impact would be on small-business customers, which often must have more than $100,000 in cash to meet payroll requirements and other needs. If the insurance coverage is increased to $250,000, about 68 percent of all small-business deposits will be insured, according to Oliver Wyman data. Today, about 51 percent of small-business deposits are protected.


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URL to article: http://blog.heritage.org/2008/10/02/how-the-fdic-cap-makes-the-rescuemore-effective/

URLs in this post:

[1] from $100,000 to $250,000: http://www.latimes.com/business/investing/la-fi-bailout2-2008oct02,0,1307485.story

[2] importance of small businesses: http://www.nytimes.com/2008/10/02/business/smallbusiness/02sbiz.html?ref=todayspaper

[3] how the increased FDIC limits help small businesses: http://www.nytimes.com/2008/10/02/business/02deposit.html?ref=todayspaper&pagewanted=print

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