We all know what the Federal Insurance Deposit Corp. (FDIC) is there for. If a bank looks like it’s already treading on dangerous financial ground, the FDIC comes in and does what it has to do. And what it usually does is find a healthy institution that can take over the failed bank’s deposit portfolio and keep the bank up and running for its customers. In some extreme circumstances where there are no takers, the FDIC would simply need to pay off the customers up to their insured deposit.

broken-piggy-fdicBut with the federal agency taking over the reins of the 94th bank closure for this year only last Friday, and with more costly failures expected until the end of the year, it looks like the FDIC will be needing some bailing out as well.

Insurance Funds Going, Going…

The FDIC’s Deposit Insurance Fund (DIF) has hit its lowest level since the height of the savings and loan crisis in 1992, dipping to about $10.4 billion as of the end of the 2nd quarter this year. That’s only 0.22% of the total insured funds and way below the 1.15% rate that should be maintained as Congressionally-mandated. This figure used to be $45.2 billion as of the 2008 2nd quarter and $13 billion last March 2009.

As more commercial real estate loans are expected to turn sour in the coming years, more banks could fold, further depleting the federal agency’s coffers. The FDIC itself has pegged the possible costs of bank failures until 2013 to reach up to $70 billion.

Alternatives Considered

To address this crucial issue, the agency, under the leadership of Chairperson Sheila Bair, is already considering several options.

One probable move is levying a special fee on banks to shore up more funds for the DIF. The problem with this proposition however, is that an emergency assessment could affect the profitability of a lot of small banks, many of which are already having a hard time keeping afloat. An alternative to this special assessment on banks is prepayment or having them pay their future insurance fund fees in advance. This would build up the FDIC’s funds fast enough without negatively affecting the financial viability of hard-up banks.

The FDIC is also considering tapping into a $100 billion credit line with the US Treasury Department. Still, another option that is being deliberated on involves the FDIC borrowing billions of dollars from the country’s biggest banks.

No Worry for Consumers

While all this talk may get the average consumer worked up on the possible failure of one’s bank and the fear of losing his life’s savings, there really is little to worry about. For as long as you are banking with an FDIC-insured bank, your deposits are still guaranteed up to the last cent (within the specified insurance limits), and fully backed by the federal government.

FDIC Chairwoman Sheila Bair put it quite clearly when she stated that, “A decline in the fund balance does not diminish our ability to protect insured depositors.” Bank clients would perhaps also feel more confident about their deposits with the knowledge that other than the Deposit Insurance Fund, the FDIC still has about $21.6 billion in cash reserves available.

The FDIC board is set to meet next week to discuss the agency’s next moves in view of this important concern.

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