Normally, when a bank fails there is adequate money to pay back depositors. But since the start of the year, nine banks have been closed by the government, the largest being IndyMac on July 11. These banks had a combined $25 billion in assets, although the federal government is not on the hook for all of that money.
For instance, of IndyMac's $19 billion in assets, about $1 billion in deposits were not insured, and the bank had enough other assets to pay back an additional $9.1 billion. The FDIC estimated today that it would have to pay out $8.9 billion in insurance, up from previous estimates of $4 billion to $8 billion.
The FDIC, created in 1933 during the Great Depression to help restore the public's confidence in the nation's banking system, receives no federal tax dollars and is funded through the institutions that it insures. Currently it has $50.2 billion set aside to cover bank failures, nearly 20 percent of which is likely to be depleted in the IndyMac insurance payback alone.
If a few more large banks -- or a lot of small banks -- fail, that fund could quickly become depleted.
Sean Egan, who heads the ratings desk of Egan Jones, sees more bank failures on the horizon but took a bit more conservative approach than Ryan.
"We wouldn't be surprised by another 15 banks," failing before the end of the year, Egan said. "But keep in mind, that many of them are smaller institutions."
He said another half dozen or so could also fail next year. Despite the lower estimate, Egan said that "absolutely" there is a chance that the FDIC could deplete its reserve fund.
"It would put a lot of pressure on the FDIC if another major bank were to fail," he said.
When a bank fails, the FDIC has to pay money out to depositors immediately while it takes time to sell off the bank's remaining assets to replenish those funds. In that circumstance, Egan said, the Treasury might be forced to loan the FDIC money.
Ultimately though, Ryan said depositors with less than $100,000 in the bank have nothing to worry about.
"The reality is anybody who is within that threshold shouldn't lose any sleep at night," he said. "For all the kind of unjustifiable bailouts being done on Wall Street there's no chance that the government is going to let John Q. Public's money disappear."
The FDIC protects deposit accounts including checking and savings accounts, money market deposit accounts and certificates of deposit up to the federal limit. The insurance does not cover products such as stocks, bonds or mutual funds, even if they are sold by your bank.
The basic insurance protects up to $100,000 in deposits at each institution for each type of ownership category. That means one individual could be insured for up to $100,000 for a single account and another $100,000 in a joint account with a spouse or somebody else.
There is also a separate $250,000 insurance limit for various types of retirement accounts, including IRAs, Section 457 plans and Keogh plans.
The type of account or bank branch makes no difference when calculating your insurance limit. You do not double your insured amount by opening both a checking and savings account at a single bank or opening accounts at separate branches of the same bank.