Why the FDIC won’t run out of money

By Felix Salmon
August 17, 2009
running low, there's a fair amount of confusion out there about whether the FDIC can run out of money. The answer is no, it can't. The insurance fund might be down to its last $13 billion, but that number is really useful only for accounting purposes. There's a government guarantee on bank deposits; the FDIC is merely the arm of the government which administers that guarantee and tries to make sure, by charging banks insurance premiums, that it doesn't cost the taxpayer any money over the long term.

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With the FDIC insurance fund running low, there’s a fair amount of confusion out there about whether the FDIC can run out of money. The answer is no, it can’t. The insurance fund might be down to its last $13 billion, but that number is really useful only for accounting purposes. There’s a government guarantee on bank deposits; the FDIC is merely the arm of the government which administers that guarantee and tries to make sure, by charging banks insurance premiums, that it doesn’t cost the taxpayer any money over the long term.

Joe Weisenthal, this morning, says that we needn’t worry about the FDIC’s money running out because “Congress will replenish the FDIC instantly” — implying that there’s at least the possibility that Congress wouldn’t replenish the FDIC. But that’s not the case. In May, President Obama signed a bill providing the FDIC with as much as $500 billion in credit at the Treasury — more than enough to cover anybody’s bank-failure worst-case scenario. That bill is now a law, which means that Congress needs to do nothing in the event that the FDIC’s funds go to zero.

I wish that the reporting on the FDIC insurance fund were clearer on this front: it’s basically just a way of keeping score, and working out whether the cost of FDIC bailouts is greater than or less than the insurance premiums that the FDIC has received from the banking industry. It has no bearing at all on the FDIC’s ability to backstop bank deposits.

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Comments
4 comments so far

Note that while the $500bn credit-line ensure the FDIC wont come up empty on Friday evening in the near future, that does not mean the rate at which they are ripping through funds is inconsequential. This is, after all, still a “self-funded” deposit insurance scheme. Presumably, to the extent the FDIC might need to tap the $500bn credit line, would not surviving banks be on the hook for those funds via future increases in FDIC premiums?

Posted by Brian McCarthy | Report as abusive

All along Sheila Bair has been spending the money she never had. The premiums that she claimed to have collected from banks were not enough for deposit protection, much less TLGP/PPIP.

It is ridiculous that many of our regulators have failed to supervise the financial industry properly but then used our tax dollars to rectify their mistakes by sharing in losses.

Please take a look at the effectiveness of FDIC’s supervisory effort and all those NEGATIVE review reports coming out of the Office of Inspector General.

http://online.wsj.com/article/BT-CO-2009 0707-713482.html

This was the first page of the latest failed bank list on the FDIC website as of July 7, 2009; 11 out of 20 were under its supervision.

http://www.fdic.gov/bank/individual/fail ed/banklist.html

Mirae Bank (NM) June 26, 2009

MetroPacific Bank (NM)

Horizon Bank (NM)

Neighborhood Community Bank

Community Bank of West Georgia

First National Bank of Anthony

Cooperative Bank (NM)

Southern Community Bank (NM)

Bank of Lincolnwood (NM)

Citizens National Bank

Strategic Capital Bank (NM)

BankUnited, FSB

Westsound Bank (NM)

America West Bank (NM)

Citizens Community Bank (NM)

Silverton Bank, NA

First Bank of Idaho

First Bank of Beverly Hills (NM)

Michigan Heritage Bank

American Southern Bank (NM) April 24, 2009

*NM = commercial bank, state charter and Fed nonmember, supervised by the FDIC*

http://www2.fdic.gov/idasp/main.asp

More recently, New York Times reported that “[r]egulators shut down the John Warner Bank of Clinton, Ill.; the First State Bank of Winchester in Winchester, Ill.; the Rock River Bank of Oregon, Ill.; the Elizabeth State Bank of Elizabeth, Ill.; the First National Bank of Danville in Danville, Ill.; the Founders Bank of Worth, Ill.; and Millennium State Bank of Texas, based in Dallas.”

http://www.nytimes.com/2009/07/03/busine ss/03banks.html?_r=1&ref=business

Again, FDIC was the main federal regulator; all these banks except for First National Bank fell under FDIC supervision (Class NM).

This week four more banks failed, two of which, Temecula Valley Bank and First Piedmont Bank, yet again were classified as NM.

money.cnn.com/2009/07/17/news/companies/ bank_failures/

“The FDIC and The First National Bank of Beardstown entered into a loss-share transaction on approximately $20 million of The First State Bank of Winchester’s [NM] assets.”

http://www.fdic.gov/news/news/press/2009  /pr09114.html

Bair decided to guarantee bonds for financial giants such as JP Morgan, Goldman Sachs, Morgan Stanley, and Bank of America, whose speculative and derivative trading contributed significantly to this”economic meltdown.” In fact, according to an analysis by The Center For Public Integrity, these were the same banks that financially backed many top “lenders who were responsible for nearly $1 trillion subprime loans:

#1 Countrywide Financial Corp

Total high-interest loans 2005-2007: At least $97.2 billion

Financial backers: Countrywide relied on credit agreements with a variety of parties, including Bank of America, JP Morgan Chase & Co., etc

#2 Ameriquest Mortgage Co./ ACC Capital Holdings Corp

Total high-interest loans 2005-2007: At least $80.6 billion

Financial backers: Underwriters of Ameriquest’s asset backed securities includedMorgan Stanley, JP Morgan Chase & Co., etc

#3 New Century Financial Corp

Total high-interest loans 2005-2007: At least $75.9 billion

Financial backers: Goldman Sachs Mortgage Company, Morgan StanleyMortgage Capital, etc.”

http://www.publicintegrity.org/investiga tions/economic_me

*imho*

Posted by PPY | Report as abusive

Well well well, Felix, it looks like they’ve gotten to YOU as well, eh?

Yes, the FDIC has a $500 billion line of credit from Congress… but who will buy those bonds? What priority will FDIC-funded bond auctions be given over the bazillions in funny money we’re hard at work printing up for everyone else who needs a handout?

The FDIC really should have considered this when it wasn’t collecting premiums for 10 years.

Now that the FDIC IS broke (regardless of whether you use accrual, cost, or equity method of accounting, 0 = 0 everytime, FS, hate to break that to you), the question becomes how soft will regulators be to keep the FDIC from being exposed as horribly insolvent?

Congress repeatedly refused to allow the FDIC to impose or increase its fees for about a decade. You can’t blame the FDIC folks, they wanted to.

Posted by Nathanael Nerode | Report as abusive
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