FDIC must decide fast how to replenish its depleted bank insurance fund
The FDIC must raise funds to make up for the shortfall caused by the 95 bank failures that have already occurred in 2009 -- up from 25 in 2008 and just three in 2007. In the third quarter of 2009 alone, 50 institutions were closed, costing the FDIC $14.9 billion.
The second quarter insurance fund balance was just $10.4 billion. Even though regular bank assessments were collected during that quarter, the fund must be close to depletion. Also, the number of banks on the FDIC Problem Bank List continues to grow. It increased to 416 financial institutions as of June 30, up from 305 as of the end of March. This is the largest number of problem banks since June 30, 1994, when the nation was at the height of the savings and loan crisis.
The FDIC insures deposits at 8,195 banks and savings associations, and promotes the safety and soundness of the financial system. All of its funding comes from the insured institutions, not from taxpayers. But taxpayers could be on the hook if the FDIC runs out of money.
Four options are under consideration by the FDIC for raising funds:
• A one time special assessment. Banks already faced a special assessment in May, when the FDIC charged them an emergency fee of five cents for every $100 of assets, excluding Tier 1 capital, to raise $11 billion in the second quarter. Obviously, the money raised from that special assessment is gone. In an interview with Bloomberg TV on August 5, FDIC Chairwoman Sheila Bair said there will likely be another assessment in the fourth quarter. But in order to rebuild the fund, a much higher assessment would be needed.
• Borrowing money from the banks. The FDIC may turn to healthy banks for money to help bail out the FDIC's insurance fund, according to a report in The New York Times last week. Banks like this deal because they can lend money to the FDIC with government guarantees rather than pay additional fees to help prop up the deposit insurance fund. But Bair does not appear to support that option. At an industry panel meeting last Friday, she said it was a possibility, but did not think it was the preferred option.
• Ask banks to prepay their fees for the next three years to rapidly rebuild the fund. That's the idea making the news on Tuesday, but it likely will receive the least amount of support from the banks. The Wall Street Journal reports that most banks that offer FDIC insurance will have to prepay three years' worth of fees to allow the FDIC to quickly replenish the fund that insures trillions of dollars of customers' deposits. But that three-year prepayment, which could bring in between $36 billion and $54 billion, might seriously injure a banking industry already under stress and possibly throw even more banks into the troubled column. The Journal could not discover when the prepayment would be required.
• Borrow money from the Treasury. That's Bair's least favorite option, but there is authority for the FDIC to borrow at least $100 billion. Sen. Carl Levin even sent a letter to Bair last week urging her to borrow money from the Treasury Department rather than requiring thousands of community banks to pay special assessments.
While Chairwoman Bair might like the idea of toughing it out on her own without asking the Treasury department for help, doing so would risk throwing more banks under the bus. Asking banks that are already struggling to come up with three years worth of assessments would be like asking some banks to commit suicide.
What could be possible, though, is that the FDIC will borrow from the Treasury on an emergency basis, with a promise to repay the funds as soon as possible through accelerated assessments, say, over the next two years -- in other words, collect three years' worth of assessments in two years. That would allow Sheila Bair to save some face, but not put more banks at risk.
Update: The FDIC's board proposed Tuesday morning requiring banks to prepay insurance fees for 2010-2012, raising approximately $45 billion. The FDIC also raised its estimate of the cost of bank failures through 2013, from $70 billion to $100 billion.
Lita Epstein has written more than 25 books, including Reading Financial Reports for Dummies and The Complete Idiot's Guide to the Federal Reserve.