By Michelle Phipps-Evans

The flurry of recent events in the financial markets has received broad media coverage throughout the nation. We have witnessed the failure of several large financial institutions ranging from the government-sponsored entities, Fannie Mae and Freddie Mac, to investment banks like Lehman Brothers, the insurance holding company American International Group (AIG), and banks and thrifts such as Indymac and Washington Mutual.  

Such failures are painful, particularly to shareholders who have lost their investments. But these failures also have consumers questioning the safety of their deposits as well as stability of the financial-service industry, their local banks and whether the Federal Deposit Insurance Corporation (FDIC) insurance fund will be there to protect their savings. The FDIC is a US government corporation, created by the Glass-Steagal Act of 1933. It provides deposit insurance, which guarantees the safety of checking and savings deposits in banks, currently up to $250,000 per depositor per bank.

“In times such as these when emotions run high, it is important to take stock of the facts of the situation, as well as the difficulties they involve,” said Commissioner Thomas E. Hampton of the DC Department of Insurance, Securities and Banking (DISB), the District government regulator for the financial-service industry. Commissioner Hampton wants consumers to consider the following facts.

First, banks are protected by the FDIC Insurance Fund. No insured depositor has ever lost money in the history of the FDIC and they will not lose money this time.

Second, the FDIC Insurance Fund is not at risk. This FDIC fund is supported by assessments made on banks and it exists precisely to protect customers in times such as these. To the extent additional resources are required, the FDIC fund is backed by the full faith and credit of the US government, which stands ready to lend to the fund as necessary.    

Third, and perhaps most important, the banking system is not going anywhere. This country has a very diverse banking system with more than 8,500 institutions. This diversity is a source of strength during times of stress as concentrations of credit and risk are dispersed. 

Fourth, the preponderance of the 8,500 banks in this country are sound and well capitalized— in fact, more than 80 percent of the country’s banks are currently profitable despite the difficult environment, according to the Conference of State Bank Supervisors.

Finally, for those institutions that do experience solvency problems—and there will be some—the majority will not fail in the traditional sense. Instead, these troubled institutions will be absorbed by healthier players, and customers will see very little, if any, disruption in their business affairs. 

In all these instances, insured depositors will be fully covered. Commissioner Hampton encourages consumers to work with the online tools provided by the FDIC such as EDIE the Estimator, which helps depositors calculate the extent of FDIC coverage on their deposits to maximize their insurance coverage.

As the foremost financial-service regulator in the District, DISB is working diligently with federal and state banking regulators and bank management to prevent problems and address difficulties as they emerge. 

During the recent weeks of extraordinary volatility in the financial markets, especially during the month of September, the agency addressed consumer concerns by sending out information relating to AIG, and to the solvency of the financial institutions DISB regulates, to the media and to the community. DISB has received several calls from distressed District residents about the money crisis and how it affects them. The agency has taken steps to deal with each.

On October 1, DISB joined forces with National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation, TDAMERITRADE Institutional and Kiplinger’s Personal Finance magazine to be part of the launch of the Your Money Bus Tour. For the next year, the financial bus will be visiting about 100 cities to help educate various communities on the need to save and the need for financial literacy.

Research shows that between 1989 and 2006, the nation’s total credit card charges increased from about $69 billion each year to more than $1.8 trillion. The national savings rate in the United States is currently at an all-time low, which means millions of American families are not in a position to plan for their long-term financial well-being. And DISB is working with other organizations to encourage consumers to save more and put less reliance on borrowed funds.

Ultimately, according to Commissioner Hampton, the District of Columbia, like the rest of the country, will come through this crisis as it has overcome disruptions in its past.

“We will emerge with a safer, sounder, and better-positioned banking system than before the current market commotion,” Commissioner Hampton said. “Through the haze of the current crisis, we are already beginning to witness the re-affirmation of traditional banking—investment banks are disappearing or being acquired while consumers turn once again to their local community bank; non-bank mortgage origination is shrinking; old-school underwriting standards are re-emerging; and the traditional bank functions of making loans and taking deposits are returning to the forefront.”

It is worthwhile to note that Congress recently passed the Emergency Economic Stabilization Act, which would authorize Treasury Secretary Henry M. Paulson Jr. to initiate what is likely to become the biggest government rescue of the financial sector in US history, allowing him to spend up to $700 billion to relieve faltering banks and other firms of bad assets backed by home mortgages, which are falling into foreclosure at record rates. The intervention is an attempt to prevent the economy from sliding into a deep recession or depression.

It is clearly recognized that a safe and sound banking system is the foundation for sustained economic growth and stable financial markets.

“We are well aware of the condition and performance of the banking industry and the many challenges faced by banks,” Commissioner Hampton added. “To that end we are prepared to work with our federal and state regulatory counterparts to address weaknesses and restore confidence in our financial system.”

Michelle Phipps-Evans is the supervisory public affairs specialist of the DC Department of Insurance, Securities and Banking.