How to replenish the FDIC’s coffers

By Felix Salmon
September 22, 2009
replenish its reserves from healthy banks, rather than from Treasury? After all, the banks will end up repaying the money, with their insurance premiums, in one form or another, and this solution gives them a bit more of a financial interest in each others' health.

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Why shouldn’t the FDIC borrow funds to replenish its reserves from healthy banks, rather than from Treasury? After all, the banks will end up repaying the money, with their insurance premiums, in one form or another, and this solution gives them a bit more of a financial interest in each others’ health.

That said, the main reasons for this happening are a bit depressing: the banks don’t want any more money from Treasury, in any form, since they hate the extra oversight which tends to come with it. And Sheila Bair, personally, “would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” according to the president of the Independent Community Bankers. Which hardly speaks to a smooth-running regulatory infrastructure.

There’s one more problem with the proposal, under which, according to the NYT, “the lending banks would receive bonds from the government at an interest rate that would be set by the Treasury secretary and ultimately would be paid by the rest of the industry.” If the bonds are coming from the government, that’s likely to mean they’ll be treated as government debt, and it certainly means that there’s an implicit government guarantee there. Once again, the FDIC is using government guarantees, rather than real cash, and pretending that doing so doesn’t cost the government anything. We’ve done that too many times already — including in the Bear, BofA, and Citi bailouts — and we should be putting an end to such shenanigans.

4 comments

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Amen.

Posted by Linda DeAngelo | Report as abusive

What is an example of a healthy bank?

They all are cooking the books still as the law chooses to allow until next year.

Oh wait, until they disclose their loses like the fed who can trust ‘em. Not me…

Posted by Examples Please | Report as abusive

Why not just increase the insurance premiums on the banks? Couldn’t it be done in a way that riskier banks — like Citi, Wells, BofA, etc. bear a higher proportion of the increased premiums?

Posted by Jason | Report as abusive

this also does not help monetary velocity one whit, for banks to be lending the FDIC fund that insures failing banks

i also find it ironic in that the FDIC is (i suspect) having a harder and harder time finding banks willing to takeover failing banks, so they ask if all the banks are willing to lend monies for the same purpose (although ofcourse, such lending is TO the govt, not to the failing banks)

interesting times

Posted by frankl | Report as abusive