The FDIC (Federal Deposit Insurance Corporation) currently covers 100% of insured deposits in member-organization banks. The list of member organization banks can be found here. The FDIC was created by the Glass-Steagall Act of 1933 (which had certain sections repealed under the Clinton administration, helping to contribute to the late 2000s financial crisis, as investment banks and commercial banks' funds were co-mingled and banks were over-leveraged, leading and contributing to the collapse of Lehman Brothers and Bear Stearns).
In order to be a member a bank must meet certain requirements for liquidity and reserve/capital. They are categorized in 5 distinct groups based on their risk-based capital ratio:
- Well capitalized: 10% or higher
- Adequately capitalized: 8% or higher
- Undercapitalized: less than 8%
- Significantly undercapitalized: less than 6%
- Critically undercapitalized: less than 2%
I will discuss this in a further post about the state of the Canadian banking system. I digress...**
As of January 2013, the FDIC will no longer cover 100% of deposits for noninterest bearing transaction accounts. One of the main reasons for this is that the FDIC currently has a fund balance of somewhere between $9 billion and $12 billion. This is insuring roughly $8 - 10 trillion in deposits - far less than even 1% of the total deposits are covered by the fund's current holdings.
What this means is that when 100% of deposits are no longer covered - 85-90% of such deposits currently being held in the TBTF banks - investors are going to yank their funds out of those banks, as there is virtually no coverage of their investment from the FDIC and they are greatly exposed - especially to the fraud being committed regularly by the TBTF banks.
Investors, then, will likely flock to short-term Treasury bonds, which are currently yielding about 1.4% - and are becoming more and more difficult to come by, as there is a shortage of short-term treasury bonds in the market thanks to the Fed's policies and actions over the last few years, screwing savers for the sake of lowered interest rates and, therefore, lower cost of borrowing for the government.
When this happens, the Treasury will not be able to handle the influx of money into their bonds. As such they will most likely announce a shift to negative interest rates - mirroring the negative interest seen from the Swiss and German banks and their 0.5% rate on Spanish, Greek and Italian bonds as bondholders look for a safe haven for their troubled investments.
It will also have an enormous impact on social security. To explain the effect of this on social security recipients, I will refer you to this article from the folks over at SilverDoctors.com.
Predictions for the future are never guaranteed, but it would appear as though a US bank run is coming soon, and it will hit hard, fast and big - and seemingly no one is expecting it.
Keep your eyes peeled, your ears open, and your money out of TBTFs - sh** will hit the fan... it's simply a question of when.