Treasury line of credit should be Bair’s last option

September 18, 2009

With the FDIC’s staring at an incredibly shrinking deposit insurance fund, it’s no wonder that Sheila Bair is out about talking about the regulators looking at options to replenish it. That includes tapping the $500 billion line of credit the agency has with the U.S. Treasury put in place for a rainy days.

Borrowing from Treasury should be avoided until it’s absolutely necessary since it is likely to give the banking lobby leverage to shirk higher fees now and in the future, as  Wrightson ICAP noted in a recent report earlier this month.

The banking lobby will argue that the FDIC should rely on funds from the Treasury rather than industry resources until market conditions improve.  Unfortunately, as the FDIC knows full well, there never seems to be a good time to hike deposit insurance premiums as far as the banking industry is concerned.  Setting the precedent of borrowing from the Treasury will stiffen resistance to contributions to the insurance fund across the board.  In addition, activating the Treasury credit line might encourage other regulatory agencies to view the DIF as a free resource for patching holes in the financial system….The FDIC doesn’t want to start flashing a platinum credit card in public as long as other agencies might want it to pick up the dinner tab.

And right on cue, at least one lawmaker is calling on the FDIC to head to Treasury rather than the banks, for more funds.

From the Wall Street Journal:

Sen. Carl Levin (D., Mich.) sent a letter to Federal Deposit Insurance Corp. Chairman Sheila Bair on Tuesday urging her to borrow money from the Treasury Department instead of hitting thousands of community banks with another special assessment to recapitalize the insurance fund that backstops deposits.

While it’s true that many small banks are suffering under the weight of souring loans, especially those made to the commercial real estate market, taxpayers shouldn’t have to be bearing the biggest share of the burden.

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