After years of protecting large deposits from loss in bank failures, the Federal Deposit Insurance Corp. has changed its policy, and is now frequently protecting individual and business depositors only up to the insured maximum of $100,000 for each insured account. Hundreds of bank depositors have been unpleasantly surprised by the change.
In theory, uninsured bank depositors have always been at risk when a bank fails, but until this year, the losses were infrequent because the FDIC usually found another bank to take over all deposits of the failed bank. But late last year in an effort to minimize losses at the FDIC, Congress passed a law requiring that the government insurance agency close banks by the least costly method for the insurance fund.
As the FDIC has concentrated on limiting the losses of the insurance fund, rather than limiting the losses to depositors, big depositors are sharing the losses with the government insurance fund when a bank fails.
In the last few months the proportion of bank failures that resulted in losses for uninsured depositors has increased sharply. Harrison Young, a director at the FDIC in charge of handling failed banks, said yesterday that about 50 percent of the bank failures this year would result in a loss to uninsured depositors, up from about 15 percent in previous years.
In the past, the FDIC would generally transfer all a failed bank's deposits to a new buyer because that approach was less costly than closing the bank and paying off the insured deposits of $100,000 or less. The new law requires that the FDIC sell only the insured deposits of a failed bank, because that results in a smaller loss to the government than the old practice of selling all deposits.
The FDIC expects about 200 bank failures this year, up from 124 in 1991, and it has already closed 21 banks. Depositors suffered a loss in nine of the 21 cases, or 42.9 percent, compared with 21 cases in all of 1991, or 16.9 percent.
"Quite a few more uninsured depositors are taking a haircut when their bank fails," Mr. Young said yesterday at a conference of the Bank and Financial Analysts Association in New York. The haircut he referred to is the loss -- often 15 to 20 cents on the dollar, but sometimes as much as 50 cents -- that an uninsured depositor will suffer when a bank closes. The amount of the loss depends on how much the FDIC can recover by selling assets of the failed bank, like securities, loans and furniture.
After his speech to the banking analysts, Mr. Young was sympathetic to the plight of depositors faced with losses, noting that "every time the uninsured are required to take a loss, there turns out to be some heartbreaking cases of charities, churches or child-care centers."
Even though losses tend to be heaviest on those least able to afford them, he said, it would be unwise for the FDIC to begin publicizing its list of troubled banks, because it would create needless alarm about banks that are troubled but will not fail.