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Answers on FDIC rate-hike proposal

Seeking confidence-building solutions amid financial disarray, the head of the FDIC, some lawmakers and the two presidential contenders are proposing an increase in federal deposit insurance to $250,000 for ordinary bank accounts.

Below are some questions and answers on deposit insurance limits and the proposal.

Q. Why are the lawmakers and the FDIC chairman proposing it?

The spiraling crisis of confidence “is feeding unnecessary fear in the marketplace,” Bair said. Allowing the FDIC to raise the limits would provide more money to banks that they could lend, and reassure depositors whose account balances exceed the current insurance limits.

Q. What are the current limits on deposit insurance?

The basic insurance amount is $100,000 per depositor per bank. Individual retirement accounts, or IRAs, held in banks are insured up to $250,000. In addition, you may qualify for more than $100,000 in coverage at one bank if you have deposit accounts in different ownership categories, such as single accounts, retirement accounts, joint accounts and revocable trust accounts.

Q. What could the effect of an increase in the insurance limit be?

“It would be helpful in calming frayed nerves,” said Mark Zandi, chief economist at Moody's Economy.com. “Depositors are scared.”

Q. What has happened in cases where a bank closes, and people have money in accounts that exceeds the insurance limits?

Those people essentially become creditors of the failed bank. They will eventually recover some of their money, but the amount can range anywhere from 40 cents on the dollar up to a full 100. Recovery of the money can take months.

When big thrift IndyMac Bank failed and was closed in July, there were an estimated $541 million in deposits that exceeded the insurance limits, out of the total $19 billion in the bank.

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