No one seems to be a fan of the trial balloon which went up on Tuesday, suggesting that the FDIC borrow money from “healthy” banks. No one, that is, except for Jamie Dimon, who jokingly told Sheila Bair at the Clinton Global Initiative this morning that he thought she was a good a credit and that he would probably be willing to lend her some money if she needed it.
What’s becoming increasingly clear, though, is that the point of the idea is to capitulate to the banking system generally, by multiplying the alternatives to the first-best solution — a simple FDIC special assessment on the banks. The banks probably wouldn’t mind very much if the FDIC tapped its line of credit at Treasury instead of borrowing from JP Morgan and others. What they would mind is taking a direct hit to their equity and capitalization ratios by having to pay unrefundable cash to the FDIC.
The plan, to put it in plain language, makes no sense.
Why would the FDIC borrow at all? The FDIC – the Federal Deposit Insurance Corporation – is funded by a levy charged to all banks. When the insurance fund runs low, the banks have a supplemental levy. It is the banks’ obligation to keep the FDIC fund topped up.
And here’s Jonathan Weil:
The question Bair posed should be a no-brainer. Borrowing taxpayer money to bail out the FDIC should be an option of last resort reserved for unforeseen emergencies.
Borrowing from banks instead of Treasury, of course, is just as bad, or possibly even worse, since it only serves to take an explicit loan, on which Treasury receives interest, and replace it with an implicit government guarantee, for which Treasury doesn’t get paid at all.
At the moment, the banks are happily sitting on artificially inflated capital ratios, a function of the fact that they never had to pay much money into the FDIC insurance fund and the fact that the FDIC is seemingly reluctant to ask them to pay, today, the real and present cost of its multiple bailouts. Rather than address the issue straight on, the FDIC is trying to come up with clever financial solutions which only really serve to kick the problem down the road. Unfortunately, given that the FDIC seems to be on exactly the same page as the banks it nominally regulates, there’s very little chance that the correct answer to the question — a special assessment — will happen.