Is The FDIC In Trouble?
The agency that guarantees depositors against loss in the event of bank failures is on the brink of a breakdown.
The capital comprising the backbone of the Federal Deposit Insurance Corp. is in danger of sinking into deficit territory by the end of this year because of the drain by failing financial institutions. Only once in history, in the loan crisis of the 1990s, has the FDIC been so endangered that it needed to borrow money from the U.S. Treasury…$15 billion dollars (plus interest).
The FDIC must share with the public how much remains in the fund, and bring current the list of banks in trouble. That number rose greatly from 252 at the end of last year to 305 in the first quarter of 2009. Sheila Blair, the Chairman of the FDIC, is expected to also use this opportunity to share how the agency plans to bolster its reserves.
Smaller banks have been most affected by the rise of loan defaults caused by the recession. The FDIC’s job is to ensure that depositors don’t lose a penny.
When looking for ways to replace funds, the FDIC can charge banks higher “insurance” fees, or it can take the more extreme step of approaching the Treasury for a loan.
Neither move necessarily affects the average bank customer. These transactions are fully supported by the government, guaranteeing depositors up to $250,000 in each account they might hold. Aside from the insurance fund of the FDIC, there are still billions of dollars in “loss reserves.”
After a long period of eyeing private equity in a negative light for taking too many chances with investor monies and over-paying managers, the FDIC board voted to make it easier for private investors to put their money into these failed smaller and medium-sized banks. This new tack has come about because of the growing number of failures and their potential hit on the consumer, and the sheer amount of money available through private investors.
The new regulations would have private investments needing to maintain the reserves of the purchased bank at 10% of its working assets. Earlier rules had the amount at 15%. The new regulations also make it easier on when the investors are required to sustain those minimum levels of capital for their banks.
In a protective measure against buying and then dumping quickly for profit, the FDIC looks to implement a rule requiring the private investors to maintain the bank’s capital for three years.
The Chairman of the FDIC has said that while the option of drawing on the Treasury for investment capital, it is secondary to the idea of raising premiums on banks.
President of the Independent Community Bankers of America, Camden Fine, says, “The more you levy these assessments on banks, the less money they will have to lend to the general population.”
Either option for banks has risks. The perception of a loan from the Treasury could be seen as just another tax-payer bailout. But charging more premiums weighs heavily on thriving banks, putting their businesses under a bigger burden.
In 2009, 81 banks have gone under, in comparison with only 25 last year. In 2007 only three banks failed. It is projected that hundreds more will go under in the years to come, mainly because of failed loans for commercial real estate ventures. With so many banks project to fail, it could put the FDIC under.
For an example of the FDIC’s burden, Guaranty Bank in Texas failed last week, at a cost to the FDIC of 3 billion dollars. That’s only part of the $19 billion lost just through March.
The FDIC estimates that an additional $70 billion will be need just to cover bank failures through 2013, five times more than was in the fund through March of this year.
Critics say that regulators have let troubled banks operate for too long. Many banks have been allowed to go on for weeks or even months in the red, which only burdens the FDIC more.
