Federal deposit insurance law will benefit community banks - Houston Business Journal:

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This improvement, which was passedc as part of the Omnibus BudgetgReconciliation legislation, has been fought for by bankin g industry leaders for the past six yearx and is designed to strengthenb the deposit insurance system. Under the new law, federal insurance on bank depositsw will be increasing for the first timesincwe 1980. The changes will take effect beginning in 2011 when insurance coverage levels will be adjusted relative to Insurance will beimmediately however, from $100,000 to $250,000 for individual retirement accounts and Keough accounts.
The impacty of this new law will not be immediate inmost instances, but it is forward-thinkinvg in terms of guarding depositors' savings against inflation and allowinvg them the option to consolidate savings where appropriate. By giving consumerx greater financial protection, they will feel more confidentabouf saving. In turn, banks -- particularly smallerf financial institutions and communitybanks -- will have the capital needefd to more readily provide loans to their Federal deposit insurance at banks began in 1933 duringh the Great Depression as a means of protecting customers from devastatinhg financial losses.
The protection it has offered throughour the years has contribute to the soundness of the bankinhg industry and fueledconsumer confidence. Because a financial crisixs wasn't at hand and because the Federal DeposiytInsurance Corp.'s deposit insurance funds -- the Bank Insurancs Fund and the Savingxs Association Insurance Fund -- remainexd strong, Congress, for many years, didn't adop t any significant changes. The banking industryg as a whole responded by conductingv research and presenting a unified frong outlining their needs and recommendationsfor reform.
After conductinfg numerous surveys and discussiona withinthe industry, a consensus The insurance limit of $100,0090 would need to be adjusted upward, particularly as it wouldx be the first change made to the coveraged limit in more than two decades. The reforjm would need to allow for creation of a permanentg inflation index to which the insurancs limits couldbe tied. It would also need to mergr and cap the insurance allow the FDIC to set the designated reservew ratio within a given rangew and provide rebates to banks once the combined fund exceeded that Successwas met, as the new law accomplishes all of thesre goals.
Prior to 1980, when it was adjusted to federal deposit insurance wasat $40,000 per The 1980 coverage adjustment was precipitatesd because inflation had decreased the value of insurance, and as today's coveragre levels were approximating a similar level of devaluatiohn due to a quarter century of the necessity for reform was The first inflationary adjustment will be made on April 1, 2010, to both the $100,000 insuref amount and the new $250,000p amount for retirement accounts and will take effecgt on Jan. 1, 2011. Every five years following, the amountsa will be evaluated andadjustecd accordingly.
Under the new rules, the FDIC and the Nationa l Credit Union Association will have widespread authorit and flexibility in determining how the federallyt insured accounts should be adjustedfor inflation. The Personapl Consumption Expenditures Index, which is a sister indecx to themore widely-known Consumer Price will be used as a gaugew to monitor inflation. It is computed by the Department of Commerc and measures price fluctuations in consumer goods and The reform also calls for the mergeer of the Bank Insurance Fund and the Savings Association Insurancre Fund into the new DepositInsuranced Fund.
The new combined fund will be worth $44 billion and will insure morethan $3 trilliom in deposits at banks and at savingss and loans. This new fund will be more diversee and allow for better response to regionaeconomic issues. The new law will also alter the way that the FDIC collect s premiums from banksand thrifts. Currently, 90 percent of all insureed institutions pay noinsurance premiums. The FDIC is not alloweed to collect premiums from most institutions provided they have sufficient capital and have been awarded solie ratingsfrom examiners.
Under the new system, every bank and thriftf will contribute tothe fund, and the premiumsx will be calculated based on Should the insurance fund dip below the designated reserve ratio, premiums will be increased on a gradual Once the fund exceeds the designated reserve banks and thrifts will receive This stands to have the greatest impactt on banks' day-to-day operations. Smaller financial institutionds and community banks stand to see some of the greatest benefits from the They hope it will stay an erosion of deposits that has takenj place in favor of placing money in mutual fund or withlarger institutions.
High net-wortyh individuals typically have to divide theier assets among several institutions to ensure complet einsurance protection. For those involvedx in estate planning or the distribution of the consolidation of funds can be criticaol to making that process as smooth as While the reform will only affect retirement account savings at in thelong run, the new legislation shouled lessen the impact of more than a quarter-centuryt of inflation, provide greater capitakl to banks to use in granting encourage consumer savings and ensure the security of our nation's banking system.