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When the banking industry is balancing on the high wire, examine the strength of the safety net.

The failure of IndyMac reminded American savers of the value, and limits, of their deposit insurance. The basic Federal Deposit Insurance Corporation guarantee covers $100,000 per person, per institution. Uninsured IndyMac depositors totaling $1bn will receive only 50 per cent of their money upfront. At the upper end of estimates, the $8bn cost of seizing the bank will shave 18 basis points from the ratio of the insurance fund’s balance to total insured deposits. Already short of its 1.25 per cent target, it is likely to fall below the level at which a top up is legally required.

Additional demands on stressed banks, from which the FDIC collects premiums, are unwelcome. The principle of slapping higher rates on the riskiest banks is meant to deter overreaching. Even so, an increase should leave premiums far short of early 1990s levels, when all banks paid 23 cents per $100 of assessed deposits. The vast majority of institutions now pay between 5 cents and 7 cents, ranging up to 43 cents. The FDIC’s fund, $53bn in March, has not kept pace with growth in insured deposits.

Premiums will rise. With five years to bolster the reserve ratio to mandated levels, the FDIC can move gradually. But it may opt to signal strength to worried savers tempted to move their money to larger institutions. It also needs a buffer against a possible wave of bank failures. That IndyMac did not feature on the FDIC’s latest 90-strong list of troubled institutions dents confidence in its funding outlook, and the prospects for preventative intervention. In extremis, the FDIC has a credit line direct to the Treasury. But that is a last resort both the insurer and an increasingly burdened Washington would like to put outside the realm of the possible.

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