As bank failures mount, FDIC may need to take out a loan

What happens if the Federal Deposit Insurance Corp. runs out of money? Most everyone with a bank account knows the FDIC guarantees deposits up to $250,000 against loss. But with bank failures surging -- there have already been 92 this year -- the agency's insurance fund is running out of cash.

That may sound like something to worry about, but most bank customers probably shouldn't fret. FDIC boss Sheila Bair says her agency may tap a credit line with the Treasury worth up to $500 billion that Congress approved earlier this year to help cover the costs of closing down failed banks.
The agency will also weigh selling bonds or increasing fees it charges banks to replenish the fund in a meeting scheduled for later this month, according to news reports.

Tapping its credit line with the Treasury raises some interesting issues for the FDIC. On one hand, its deposit insurance fund is now paid for solely by banks, so the recent wave of failures has not yet cost taxpayers. Borrowing from the federal government would potentially change that. On the other hand, banks are sure to protest any additional charges from the FDIC. They're having a hard enough time making money as it is, they'll say.

There's another issue, too, one that Bair acknowledged when she laid out the agency's options at a conference in Washington on Friday. Half a trillion dollars "begins to approximate the maximum loss from resolving the top four banks," Chris Whalen, managing director at Institutional Risk Analytics, a financial research and consulting firm, told CNN Money in March. ("Resolve" being another way to say "seize" in case of failure.)

"There is a philosophical question about the Treasury credit line, whether that is there for losses we know we will have or whether it's there for unexpected emergencies," Bair said, according to Bloomberg News.
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