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Is your life savings safe with FDIC insured accounts?

January 1st, 2020

A lot of people have been talking about the best place to put your savings, also known as excess production. Another way to put it, what is the best (safest) way to make money on your money.

(Please note all rates below are as of January 16th 2020, however, we've provided links to updated rates if reading at a later date)

Let's start by understanding the relationship between your savings and your bank. When you lend your money to the bank, the bank will give several options with annual returns:

  1. Checking Account ~0.000001% annum
  2. Saving Account ~0.3% annum
  3. Certificate of Deposit (CD) ~2.2% annum
  4. Money Market Account (MMA)~2% annum

You can compare your options here at Nerd Wallet.

Why does a bank want your deposits? When you look at the banking business model, you'll find that they borrow short and lend long, and are required to have reserves as a percentage (10%) of what money they lend.

You might be asking, how does a bank afford to pay you back 2.2%, while on a checking account they only pay you 1 millionths of a percent?

When you do a Google search to find out how the bank makes you this return, you'll see that it's difficult to find a clear answer. Rather you will find a lot of information on how safe they are because they are FDIC insured.

Using a line from Tommy Boy, rather than take the butcher's word for it, let's take a look up the bull's ass.

If you look over at the Federal Reserve Bank of New York's diagram Mapping U.S. Dollar Funding Flow, you'll find the bank's options with your money:

Commercial Paper: This is a short term loan, usually under a year, to a corporation. The going interest rate is 1.54%, under the 2% MMA rate.

Eurodollar lending: Lending dollars to foreign banks so they can use the dollars as reserves to create more loans. The going rate on CME is 1.76%, again under the 2% MMA rate.

US Debt 1 Year: Buying debt from the US treasury. Currently, this is yielding 1.54%, under the 2% rate.

Repo Market: The oil of the economy, these repurchase agreements are made for short-term borrowing between large financial institutions. Showing the current rate of 1.56%, again below our 2% target.

FX Swaps Market: Investing in foreign insurers and other money managers. Currently, banks are getting LIBOR plus what they charge. The current LIBOR rate is...1.95%!

You may ask, does it really matter if the banks gamble with my money if they are insured by the FDIC (up to $250,000)?

The FDIC is not the first insurance agency that we've had insuring bank deposits. Let's not forget about the FSLIC. If you look back, the S&L bank crisis was when the FSLIC went completely bust in the 1980s, which required a 150 billion dollar bailout.

The FDIC has roughly 25 billion dollars in its fund, while they are insuring 9 trillion dollars worth of deposits, less than 1% of the deposits they insure. In 2009 the fund dropped down to 0.648 billion dollars. They almost went bust.

Simplicity is the ultimate sophistication