Friday, July 29, 2011

US Debt Default Could Prevent Necessary FDIC Deposit Insurance Payments

As of December 31, 2010, the financial statements for the FDIC Deposit Insurance Fund (DIF) showed the fund holding a face value of $12.3 billion of US Treasury obligations. The DIF also holds $27.1 billion of cash and cash equivalents, which consists of overnight US Treasury obligations. In total, 49 percent of the deposit insurance fund's assets of $81.1 billion are US debt.

The US debt is likely also the most liquid part of the insurance fund total holdings. Additionally, the DIF received $205 million in income from interest payments on its US debt holdings.

If there is a US default on its debt obligations and also a bank failure, will the FDIC have the needed liquid assets to pay insured depositors and deal with any bank failures during the period of default? There could easily be bank failure situations where the FDIC is cash constrained and unable to pay deposit insurance claims during a US debt default, effectively delaying payments on deposit insurance claims.

As stated in the FDIC deposit insurance fund financial statements:
Investment in U.S. Treasury Obligations
DIF funds are required to be invested in obligations of the United States or in obligations guaranteed as to principal and interest by the United States. The Secretary of the Treasury must approve all such investments in excess of $100,000 and has granted the FDIC approval to invest DIF funds only in U.S. Treasury obligations that are purchased or sold exclusively through the Bureau of the Public Debt’s Government Account Series (GAS) program.

The DIF’s investments in U.S. Treasury obligations are classified as available-for-sale. Securities designated as available-for-sale are shown at fair value. Unrealized gains and losses are reported as other comprehensive income. Realized gains and losses are included in the Statement of Income and Fund Balance as components of net income. Income on securities is calculated and recorded on a daily basis using the effective interest or straight-line method depending on the maturity of the security.

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