Letter Re: The Impact of FDIC Insurance Rate Increases on Small Banks

Mr. Rawles,
We live in mostly rural northeastern Oklahoma. Our local newspaper just printed an informative editorial about FDIC changes which result in huge fee increases for member bank. Here is an excerpt from the editorial Oklahoma banks paying price for bailouts:

“Imagine paying $500 per year for your car insurance and then being told it had gone up to $4,000 even though you have been a perfect driver with no accidents, no moving violations. That’s the magnitude of premium increases local bankers are facing. The local banks I spoke to had no part in the sub-prime loan implosion and did not receive one cent from the bail out. However, they were not expecting large “assessments” in addition to huge premium increases. The first assessment, due September 30th, will likely be 4 times larger than all of the premiums each bank paid in 2008. Another assessment, half that size is anticipated before the end of 2009. To put this in perspective, a bank that paid, for example $250,000 in total for 2008 would pay nearly $500,000 per quarter this year, have an additional $1 million assessment in September, and another half million later in the year for a total of $3.5 million for 2009. So, if your bank fails, the Government takes your bank, if you operate a fiscally responsible bank, the FDIC will now take a big chunk of your bank’s money.” [signed] Bailey Dabney, Publisher, Claremore Daily Progress

– Kevin A.

JWR Replies: A recent news story makes it clear why the FDIC was forced to increases their rates: FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year. (A hat tip to SurvivalBlog reader “Hin” for the link.) After the much-publicized Northern Rock bank run in England, the FDIC felt obliged to double the insurance coverage for depositors. Without that grandstanding move to set people at ease, bank runs might have started in the US. But despite increased insurance and greater scrutiny of member banks, the fundamental flaw of fractional reserve banking remains: Only a small portion of your deposits is available for withdrawal at any given time. If public confidence collapses, there will be large scale withdrawals, precipitating full-scale bank runs. Be ready, folks. If bank failures spiral out of control–and there is now a substantial risk of just that—things could get very nasty, very quickly. The “final guarantor” for the FDIC is of course the American taxpayer. Promises will be kept, even if there are huge bank runs. Helicopter Ben has plenty of paper and ink. It just may take a long time to print that many greenbacks and set things back in order. But in the short term, if there is a banking panic, depositors may have to wait six months or longer, to be reimbursed.

Keep a cash reserve at home. Maintaining up to two month’s wages, mostly in $20 bills, would be prudent–if you can afford it! But don’t just sit on a pile of greenbacks, diversify. You should also keep some liquid tangibles on hand. By tangibles, I mean pre-1965 mint date circulated “junk” 90% silver US dimes, quarters and half dollars, and perhaps a few fractional gold coins. (Buy gold coins only after you have $1,000 face vale in silver for each family member. The silver can act as your barter reserve.) Store your coins in hidden wall and door caches. You might also consider leaving a small “sacrificial” portion of your coins in your home gun vault–just in case you are forced to open your vault at gunpoint, in the unlikely event that you are caught off guard in a home invasion robbery.

DO NOT store your precious metals in a bank safe deposit box! In the event of “bank holiday”, you will not have access to your coins. I wouldn’t be surprised to see all safe deposit boxes sealed, in the event that BHO channels FDR and there is another 1933-style gold confiscation. (Presumably, the box holder’s first access following a banking holiday would only be allowed under the watchful eyes of authorities.) There are just a few private safe deposit companies that are not bank-owned, like this one in Las Vegas, Nevada. Those might be immune from the depredations of grabby politicians, but don’t count on it.