The entire banking insurance schemes created during the aftermath of the Great Depression, are predicated upon an ASSUMPTION that a bank failure is a single isolated event. The contingency plan for a wide-scale banking collapse will default to a ‘per person’ basis despite what anyone else says. I have been in meetings and that is the stated fallback position. The closest example was the S&L Crisis of the late 1980s caused by Congress raising taxes changing the tax credits for real estate which led to a sell-only market.
The S&L institutions were insured by the Federal Savings and Loan Insurance Corporation (FSLIC) which was established to provide insurance for individuals depositing funds into S&Ls. When S&L banks failed, the FSLIC was left holding a $20 billion check. They inevitably left the FSLIC corporation bankrupt. The Federal Deposit Insurance Corporation (FDIC) that oversees and ensures banking deposits today is what also comes into play. During the S&L crisis, the deposits of some 500 banks and financial institutions were backed by state-run funds. The collapse of these banks cost at least $185 million and destroyed the concept of state-run bank insurance funds since they could not cover the losses.
This post was published at Armstrong Economics on Nov 20, 2017.