Stanley Langbein Explains the Why the FDIC is Not a Major Post-Debt Ceiling Worry

In an email he has kindly allowed me to quote, my banking expert colleague Stanley Langbein explains the FDIC issue as follows:

The FDIC is largely funded through premiums charged to the banks, and has backup authority to reach, essentially, the entire capital base of the depository institution industry. It also has authority to borrow from the Treasury, which it did in late 2008 (after TARP was past), and indeed it was an FDIC guarantee program, NOT the TARP, which mostly stabilized the industry — Goldman Sachs and Morgan Stanley, for instance, became and remained bank holding companies, not to access the TARP (which they were allowed to do without becoming BHCs), but to access the FDIC guarantee program. The FDIC still has outstanding debt to the Treasury from this episode.

For this reason, a failure to raise the debt ceiling is not likely to have any immediate effect on the FDIC’s funding sources. Presumably the matter would be resolved before the lack of Treasury funds would affect the FDIC’s insurance funds.

That being said, bank runs are caused by perceptions, not objective facts. If you can worry about this, I suppose there are at least 250,000 individuals who are less sophisticated, most of them far less so, who can worry too. I don’t know if this could cause a “run” on the banks, because in the envisioned circumstances I don’t think there would be any place to run.

But I don’t think Congress will refuse to raise the debt ceiling. The primary effect of this episode, however, will be to put a question in the back of everybody’s mind about government credit and government guarantees generally. That will affect confidence in FDIC insurance, I think, in the long if not the short run. So on some level I think you are right to worry about it.

Actually, I find that mostly reassuring….

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