FDIC wants to temporarily boost deposit insurance limits

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The Federal Deposit Insurance Corp. will seek authority from Congress to temporarily raise deposit insurance limits, the agency’s chairwoman, Sheila Bair, said today.

Citing ‘an increasing crisis of confidence that is feeding unnecessary fear in the marketplace,’ Bair said ‘it would be helpful for the FDIC to have the temporary ability to raise deposit insurance limits.’

She didn’t specify how high the FDIC might want to go. The current basic limit on insurance is $100,000 per depositor per bank, but consumers can substantially boost their coverage using joint and other accounts.

Raising the limit ‘would provide the dual benefits of providing additional liquidity to banks for lending as well as provide some additional reassurance to depositors above the current limits,’ Bair said.

The government’s decision to seize Washington Mutual Inc. last week was hastened by heavy deposit outflows from the huge savings and loan, the Office of Thrift Supervision said.

Even at healthy banks, customers have been questioning whether it’s worth the risk of keeping any deposits that exceed the current insurance limits. That poses a challenge for business depositors in particular.

Higher limits could be most helpful to smaller banks as they struggle to hold on to deposits amid public fears of more bank failures because of loan losses.

‘As always, any potential borrowings from Treasury to support this additional coverage would need to be paid back through the FDIC’s primary funding source -- industry assessments,’ Bair said.

Earlier today, Sens. John McCain and Barack Obama both backed the idea of an increase in the basic insurance limit to $250,000.