It’s a Wonderful Life
Getty Images. George Bailey played by Jimmy Stewart.
March 2023
Time to revisit deposit insurance.
I wrote the article below on FDIC insurance about 2 years ago. Given the failure of Silicon Valley Bank and the large number of uninsured depositors, I thought it time to revisit the protection depositors have.
from January 2021
Produced in 1946, the movie “It’s a Wonderful Life” is the story of George Bailey. George runs the Bailey Brothers Building and Loan. The time frame of the movie is 1919 to 1945, a time when banking and loans were done with cash.
George’s uncle Billy is responsible for depositing $8,000.00 into the company’s bank account but instead “misplaces” the money.
With a bank examination under review, George tries in vain to raise $8,000.00. George realizes that without the money the bank could fail, and he could face scandal and criminal charges.
There is great dialogue in the movie on how banks and loans work.
Jump to 2021.
Do you have cash sitting in a bank or brokerage account? Is it safe? Is it insured? Are you sure?
An independent agency of the federal government, the Federal Deposit Insurance Corporation (FDIC was) created in 1933 in response to the thousands of bank failures that occurred in the 1920s and early 1930s.
Yes, banks still fail as in “go out of business” You have probably heard the term “a run on the bank”. Today it would be an online run on the bank.
Banks have to make money just like any business.
When people deposit money in a bank, the bank uses deposits to make loans. They do not actually keep your cash in a subterranean vault.
This is how it works: You deposit cash, and the bank pays you some tiny amount of interest.
The bank then uses your cash to make loans. A mortgage loan is a good example.
The bank charges the mortgage borrower 3%. The difference between the 3% the bank collects from the borrower minus the amount they pay you on savings is profit for the bank.
In this example if the bank is paying a quarter of one percent or 0.25% on a savings account , and lending at 3% the profit to the bank is 2.75%. Annually.
Hey wait a minute! Can the bank lend my money to someone else? Yes, they can!
What could wrong?
A lot, as it turns out.
What happens when someone can no longer pay their mortgage? The income from the mortgage loan stops, and now the bank owns the house.
What happens if a lot of people start defaulting on their mortgage loans at the same time and the economy is headed south?
Depositors get nervous.
The depositors run to the bank to withdraw their cash, but the bank made loans with the deposits and doesn’t have the cash on hand. What happens? The bank can fail. A bank can go bankrupt.
Sound familiar? This is a simplified version of what happened during the financial and housing crisis of 2008.
I digress, but one of the other big problems in the financial crisis of 2008 is that “mortgage originators”, companies that were not banks or part of the regulated banking system, started lending money .
Money they did not have because they did not require deposits.
Phony lenders (also known as Shadow Banks) believed that housing prices only went UP. Someone defaults on their loan? no problem, we reclaim the house and sell it for a higher price.
Phony mortgage originators were not required to have deposits or “cash backing” their loans.
Banks on the other hand, who have depositors, saw their profits tank as defaults piled up. Creating a risk to the bank and the banking system.
The FDIC insures cash deposits. If a bank fails, the FDIC steps in and gives you back your money.
Before 2008, the maximum amount of insurance the FDIC provided for a cash account was $100,000.00.
A depositor might have several accounts adding up to more than $100,000.00. In that case there are specific requirements for the type of accounts that would each qualify for insurance.
In 2008 the FDIC raised the deposit insurance amount to $250,000.00 per owner and per qualified account. It remains at $250,000.00 today.
If you have not quite reached that $250,000.00 limit, nothing to worry about. When you do, it is good to know how your deposits are insured and for how much.
Is cash in a brokerage account insured?
The Securities Investor Protection Corporation (SIPC) is a nonprofit organization that protects stocks, bonds, and other securities in case a brokerage firm goes bankrupt and assets are missing. The SIPC will cover up to $500,000 in securities, including a $250,000 limit for cash held in a brokerage account.
FDIC: Are My Deposit Accounts Insured by the FDIC?
The Morality of Banking in ‘It’s a Wonderful Life’ – The Atlantic
It’s a Wonderful Life – watch now
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