FDIC Shores Up Bank Liquidity

This should lead to a massive churning of bank debt over the next 30 days, as institutions scramble to refinance at lower rates, while avoiding a significant fee.

Business Transaction Accounts

Under the new program, the FDIC will provide participating institutions with unlimited deposit insurance coverage on all non-interest bearing transaction deposit accounts, even those with balances exceeding the FDIC's temporary individual account insurance limit of $250,000.

Banks and thrifts that choose to participate in this program will have a 10-basis point surcharge added to their current FDIC deposit insurance assessment.

All banks and thrifts will have their non-interest bearing deposit transaction account balances covered by unlimited FDIC insurance for the next 30 days. After that, unless they opt out of the program, the institutions will be assessed the 10-basis point surcharge and the coverage will continue until the end of 2009.

This prevents the type of loss faced by businesses when a bank or thrift fails. Businesses and other entities can easily have very large amounts of somebody else's money flowing through a transaction account at any time, facing major risks when an institution fails, as we discussed last year when NetBank was closed down.

This should reduce the likelihood of the type of rapid deposit flight that brought down Washington Mutual (whose branches and deposits were then taken over by JPMorgan Chase (JPM Quote)) and almost brought down Wachovia (WB Quote), set to be acquired by Wells Fargo (WFC Quote).

Depositors Still Face Risks

They sure do, since the new coverage only extends to non-interest bearing transaction accounts. That leaves a whole range of deposit accounts under the FDIC's temporary $250,000 limit for deposit insurance on individual accounts. Insurance coverage gets more complicated for multiple joint accounts and accounts held in the names of trusts and other entities. Please see the FDIC's guide to Insuring Your Deposits for more details.