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Tuesday, July 15, 2008 1:40 AM

How Many Uninsured Deposits Are At Risk?

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Five banks have gone into receivership this year, the latest of which is IndyMac which became the largest OTS-regulated savings and loan to fail and second-biggest financial institution to close behind Continental Illinois in 1984, according to the FDIC.

Nonetheless, the FDIC is very fond of saying "No saver has ever lost a dime in federally insured deposits."

That's fine and dandy but inquiring minds are looking ahead and asking "How much uninsured money is at risk, not just at IndyMac but in the entire system?"

It's a good question, but first let's dig a litter deeper into what is happening at IndyMac.

IndyMac Answer Sheet

The FDIC has a Failed Bank Information Answer Sheet on IndyMac to answer depositor questions. Here are answers to 3 questions of general interest you may not know.

2. I am a deposit broker or I have a deposit through a broker. What do I need to do?

If you are a customer who has an IndyMac Bank deposit through a broker, you must contact your broker with any questions. Once the FDIC receives a balanced investor file along with all the required documentation, from your broker, your insured funds will be wired to them on your behalf.

4. Will I collect my uninsured deposits?

If it is determined that you have some uninsured funds, the FDIC will mail you a Receiver Certificate. This certificate entitles you to share proportionately in any funds recovered through the sale of the assets of IndyMac Bank. You will eventually recover some of your uninsured funds. Of course, you will receive immediate full payment for your insured amount by transfer to IndyMac Federal Bank or from your broker. In addition, the FDIC will pay uninsured depositors an advance dividend of 50% of your uninsured deposit.

For an explanation of the dividend process go to FDIC Dividends from Failed Banks.

11. Will I continue to earn interest at the same rate?

Yes, interest will continue to accrue at the contract rate on all non-broker deposits. If you deposited funds through a broker, the interest will accrue and be paid through Friday, July 11, 2008.
Clearly the process is messier if you are holding CDs or deposits through a broker.

50 Cents On The Dollar

MarketWatch is reporting Give no credit when creditors are due.
"You can count on us" was their slogan. Not quite. IndyMac Bancorp Inc. had $1 billion of uninsured, unsecured, and unprotected consumer deposits at stake. The 10,000 uninsured depositors will get 50 cents on the dollar now and wait for the rest.

IndyMac is a much bigger version of last September's failure of Alpharetta, Ga.-based NetBank, which had $109 million of uninsured deposits at the time of its failure. Uninsured NetBank depositors got 50 cents on the dollar and a conservator's certificate for the rest. Four other banks failed this year and uninsured depositors have received no immediate reimbursement.

This time the stakes are much higher. IndyMac's uninsured depositors' balances are about 10 times that of NetBank's -- 10,000 uninsured depositors with a total of $1 billion in deposits. The average payoff over the past 12 years has been 72 cents on the dollar. It can take years to collect whatever is left for the uninsured depositors.
The rest of the article contains an interesting history of IndyMac, started in 1985 by by Angelo Mozillo and David Loeb, founders of Countrywide, as Countrywide Mortgage Investment and then spun off in 1997 as an independent bank making mostly Alt-A mortgages too big to be sold to Fannie Mae or Freddie Mac.

With that history out of the way and a possible starting point of 50 cents on the dollar, let's return to the initial question with a look at FDIC insured deposits.

Total FDIC Insured Deposits

click on chart for sharper image

The above chart, reflective of 2007-09-30 is from page 32 of the FDIC Year End 2007 Highlights PDF.

The amount, from page 36 is $4,244,547 Billion ($4.24+ Trillion). Sorry, but I do not have a more current figure. It should be reasonably close.

Total Bank Deposits

Total Bank Deposits can be found in the Current H8 Report. The following numbers are from July 11, 2008.

Deposits, from line 17 are $6,840.40 Billion ($6.84 Trillion).

$6.84 Deposits - $4.24 Insured Deposits = $2.6 Trillion Uninsured Bank Deposits

I leave it to you to decide if that would be worth 50 cents on the dollar, 73 cents on the dollar, or zero cents on the dollar should something spectacular happen.

Inquiring minds will not stop there. They want to know how much actual bank cash is on hand if there is a run on the banks. For that we look on line 14. The answer is $273.7 billion.

Here is footnote #5 as to what cash includes: 5. Includes vault cash, cash items in process of collection, balances due from depository institutions, and balances due from Federal Reserve Banks.

FDIC Recap
  • There is $6.84 Trillion in bank deposits.
  • $2.60 Trillion of that is uninsured.
  • Total cash on hand at banks is $273.7 Billion.

Huge Potential For Bank Runs

If uninsured depositors start asking for cash on the barrelhead, things can get mighty ugly mighty fast.

This is pure speculation on my part but I suspect the vast majority of those uninsured deposits are corporate accounts. Going one step further, anyone with a corporate account at a distressed institution better do something about it pronto unless employees will be happy with a delayed paycheck of 50 cents on the dollar.

For a partial list of places to be especially worried about please see How Many Bullets Does The Fed Have Left?

Do I Smell New Rules?

One way that I can see for the Fed can halt potential bank runs is to offer unlimited FDIC insurance for corporate accounts. Otherwise, who in their right mind would want to hold corporate accounts at any number of problematic institutions?

However, such new rules would raise many concerns including yield chasing and zombification of banks that deserve to fail.

Mike "Mish" Shedlock
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