Commentaries

from Rolfe Winkler:

Deposit Insurance Fund, UNoffcially

I was heading out for Thanksgiving vacation when FDIC released the quarterly banking profile, so I wasn't able to update an important chart: Total Insured Deposits, Unofficially.....

(ht Stephen Culp)

When the world was falling apart, FDIC increased deposit insurance limits....to $250,000 for individual non-retirement accounts and unlimited for business transaction accounts. But those increases were treated as "temporary" and so left out of FDIC's total.

Since the $250,000 limit was extended to 2013 -- decidedly not "temporary" -- FDIC started collecting that data from its member banks. The data was published for the first time in Q3.

So in Q3, the official figure -- which includes $250k limits -- jumped from $4.8 trillion to $5.3 trillion. Throw in the $761 billion insured by the transaction account guarantee program and you've got a total of $6.1 trillion of insured deposits. Compare to Q3 '08. Back then, before all the emergency measures, the total was $4.5 trillion. So the increases added $1.6 trillion, or 34%, to the total.*

I've juxtaposed that with the reserve balance on the Deposit Insurance Fund. It's now negative, though that doesn't mean FDIC is out of cash. And they've got another $45 billion coming this quarter, but for accounting reasons the reserve will still be listed as negative.**

Treasury line of credit should be Bair’s last option

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.

from Rolfe Winkler:

For FDIC, a long tunnel and little light

There's good news and bad news in the FDIC's quarterly profile of the banking sector. The good news is that FDIC has more resources than you think to handle the problem banks on its radar. The bad news is that the too-big-to-fail banks aren't on it.

The balance in the FDIC's deposit insurance fund ended the quarter at $10.4 billion -- its lowest since the savings and loan debacle -- but it isn't the only security blanket protecting insured depositors. The agency also has a "contingent loss reserve."

If you add the loss reserve to the deposit insurance fund balance, the FDIC's total resources were $42 billion at the end of the second quarter. Despite 24 bank failures during the quarter, that total actually increased by half a billion dollars.

How could that be? The biggest reason is that the FDIC is finally getting serious about charging premiums for the insurance it provides. Member banks were charged $9.1 billion to replenish the fund last quarter. That's up from $2.6 billion in the first quarter and $640 million a year ago.

(Click chart to enlarge in new window)

A similar amount may be raised this quarter if the agency charges banks another "special assessment." While that decision won't be made till next month, it looks likely. That's great news for taxpayers who would otherwise have to plug the hole if the FDIC runs out of money.

Banks complain that special assessments put too much pressure on them at a tough time. But it's their own fault the deposit insurance fund is running so low.