Who’s Going to Bailout the FDIC?
Sep 23, 2009
Posted by Jody Eisenman | Filed under Uncategorized
As discussed on this blog previously (http://www.jodyeisenman.com/2009/03/even-sheila-bair-concurs-the-fdic-may-be-insolvent/), the Federal Deposit Insurance Corporation is running out of funds. According to FDIC’s own estimates, bank failures will cost the fund around $70 billion through 2013. Although congress has mandated a minimum of 1.15% in reserve of all insured deposits held by banks, the current number is now at a miniscule .22%. Currently, The FDIC has about $10 billion insuring $4.8 trillion in deposits. In addition, 92 banks have failed this year, with a real possibility of many more going forward. Since the FDIC never wants to be in the doomsday scenario position of not being able to bail out the depositors in a failed bank (such an event could conceivably cause a huge withdrawal from all banks, thus effectively ending the banking system as we know it), the FDIC must raise more funds. They currently have three possible means of doing so:
1. Hit up the small banks for more money.
This is attractive from the standpoint that the additional fees would be spread over a large base. On the other hand, there is something inherently wrong in my eyes in taxing the healthy survivors to bail out the riskier ones. If I were running a small bank, I would feel put out if I didn’t take major risk, didn’t earn humongous fees and salaries, and now be forced to bail out the ones’ that did.
2. Go back to the Fed.
This past May, congress passed a bill that allows the FDIC to borrow up to $100 billion from the US government. However, the head of the FDIC, Sheila Bair is reportedly against it, somewhat due to her differences with Fed Chief Tim Geithner.
3. Borrow from the banks.
Based on a law passed in 1991 during the savings and loan crisis, the FDIC has the right to borrow from the member banks, assuming they are willing to lend. This is rather ironic, considering that the government bailed out the vast majority of large banks last year. Thanks to low interest rates and access to huge capital, banks are now in a very different position from where they were a year ago. The lending banks could lend to the FDIC at an interest rate set by the Treasury Secretary. Ultimately, these funds would be repaid by the entire banking industry, which is sort of similar to option 1. However, since this could be repaid over a period of years, the hit to the industry would be minimized.
The FDIC board is made up of Bair, 2 other FDIC officials, and the heads of the Office of Thrift Supervision and Controller of the Currency. Although a decision must be reached fairly soon, there is apparently no consensus among the members.
Today is Fed day, where the Federal Reserve gets to make any changes in interest rates. As rates are now effectively zero, they cannot go lower, and it is highly unlikely that they would raise them. However, the statement they make regarding the economy and the future can have a real effect on the markets. My bet is that this will be a non-event.
November 30th, 2009 at 5:44 pm
[...] know that the FDIC has been running out of reserves due to the high number of bank failures. As I wrote back in September, the FDIC was down its’ last 10 billion in reserves. With the failure of fifty [...]