One Bank Failure After Another – How Is The FDIC Holding Up?

For the first five months of this year, the Federal Deposit Insurance Corporation has overseen to the foreclosure of 36 banks…and counting. With the recent demise of Florida-based BankUnited FSB which will reportedly cost the federal regulators some $4.9 billion, one can only wonder how the FDIC fund is holding up.

What the figures are saying

For the government agency that serves as the consumers’ last bastion when it comes to the security of their deposits, the numbers don’t look too good right now. The FDIC recently revealed that in just the first quarter of this year, the number of troubled banks and thrifts that they are currently monitoring has grown to 305. This is the longest that the list has grown since 1994, and is a 21% increase from the 2008 fourth quarter figure. The combined total of these problem banks’ assets amount to $220 billion, an increase of more than 35% from last year’s figure of $159 billion.

While the banks that appear in the FDIC’s watch list aren’t necessarily on the brink of failure, the financial challenges that they face are much tougher given today’s economic scenario of rising loan defaults on home mortgages, commercial real estate, and credit cards.

More failures to come

And that’s not even half of the picture. FDIC Chairwoman Sheila Bair has noted in the past that among the bank names that get to be included in the list, only about 13% of these ultimately fail. Still, with the effects of the recession likely to be felt even in the next few years, financial analysts expect that about 1,000 more banks could fail from 2009 to 2012.

The costs to the FDIC

Indy Mac’s closure last year cost the FDIC a hefty $10.7 billion. As more financial institutions were closed this year, over $10 billion more was taken out, bringing down the agency’s fund to a low of about $13 billion in the first quarter of the year alone. This has been the lowest the insurance fund has dwindled to since the savings-and-loan crisis of 1993. A request for additional funding was granted on May 19 when Congress more than tripled the FDIC’s borrowing authority from the Treasury Department to more than $100 billion.

Special assessment

Despite its being a government agency tasked to oversee banks and thrifts, the FDIC’s funds actually come from the financial institutions themselves. The usual annual fee that banks pay is a 12- to 16-centavo charge per $100 in deposit. To replenish the fund’s fast depletion, Chairwoman Bair proposed that a special assessment be collected from all banks amounting to 20 cents per $100 deposit. This was met by massive protests from banks, so the agency, voting 4-1, settled on a compromise assessment of 5 cents per $100 of assets.

The FDIC estimates total banks’ assets to be somewhere around $13.1 trillion and excluding core capital which accounts for about 7.19% of the banking industry’s total assets, the special assessment is expected to generate some $5.6 billion for the insurance fund.

Big banks to pay lion’s share of assessment

Owing to the revised scheme of charging banks based on assets instead of deposits, the bigger banks will be paying for roughly 76% of the fees or about $4.3 billion of the estimated $5.6 billion that will be raised from the special assessment.

This change in the method of assessing banks has drawn flak from members of the American Banking Association but FDIC Chair Sheila Bair stands firm on this decision noting that the larger banks have earlier benefited from “massive government aid” in the form of TARP funds. This privilege was unavailable to the smaller banks which put them at a higher risk for failure.

The FDIC further states that they may opt to charge another special assessment in the fourth quarter of this year and in early 2010 if there is a need for such.