07/28/2011 07:41 pm ET Updated Sep 27, 2011

Ask the Expert: Does the Debt Ceiling Debate Threaten Deposit Insurance?

Q: Of all the things said to be threatened by the debt ceiling debate -- bond payments, social security checks, etc. -- one thing I haven't heard mentioned is FDIC deposit insurance. Since this is a federal program, couldn't our deposit insurance be at risk if the government runs out of money? After all, owners of savings accounts, money market accounts, and CDs have gotten the short end of the stick from government policies so far.

A: Even though FDIC deposit insurance is a federal program, it is not likely to be an immediate victim of a possible federal government default. In the long run though, anything is possible if things reach such a dire outcome.

The reason why deposit insurance wouldn't be immediately affected by a federal government default is that deposit insurance is funded by an assessment on banks, and not directly by the federal government. Although the FDIC is a federal agency, it does not receive any Congressional appropriations for its operations.

However, that does not mean that deposit insurance would be completely immune if the federal government fails to live up to its responsibility to find a budget solution. For one thing, while the vast majority of FDIC funding comes from bank assessments, the agency does receive a minute portion of its revenues from interest on U.S. Treasury securities.

A bigger worry might be that if the U.S. government actually defaults on some securities, it is possible that the financial chaos that would follow could cause a spike in bank failures that would overwhelm the insurance fund. After all, this fund is just over 1 percent of insured deposits. It is predicated upon failures being rare exceptions, not a widespread epidemic.

In short, savings accounts, CDs and money market accounts don't seem especially vulnerable to a federal default, but like a surprising number of things we count on every day, deposit insurance could be subject to disruptions if the government cannot pay its bills.

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"Ask the expert: Does the debt ceiling debate threaten deposit insurance?"