For FDIC, a long tunnel and little light

August 27, 2009

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.assessments

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.

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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.

According to a Boston Globe article by Michael Kranish earlier this year, about 95 percent of banks paid nothing for their deposit insurance from 1996-2006. But that wasn’t FDIC’s fault; they were prevented by law from charging premiums. Congress didn’t think it was necessary. Oops.

So the deposit insurance fund will be under pressure for some time. FDIC’s problem bank list grew to 416 at the end of last quarter. These banks have $300 billion of assets.

In total, FDIC estimates the banking sector is wrestling with $332 billion worth of loans and leases on which borrowers have stopped making payments. That excludes hundreds of billions worth of underwater loans that may be current now but will ultimately default. Many banks, including the largest ones, are likely to struggle for some time.slide2

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And that’s the bigger story here. Citigroup and Bank of America have received hundreds of billions of dollars of government support, but, precisely because of that support, they’re not on the FDIC’s list. Adding them to it would multiply total problem assets 10 times, to $3 trillion.

Overall, the deposit insurance fund is tiny compared with the total amount of deposits that are insured. The official total is $4.8 trillion, but that excludes “temporary” increases in deposit insurance instituted last fall.

One program, which increased insurance limits to $250,000 for individuals, now backs $725 billion of deposits. Earlier this year it was extended to 2013. The other program, which provides unlimited insurance coverage for transaction accounts, backs $736 billion of deposits. On Wednesday, that program was extended through June of next year.dif-slide

Add those amounts to the official figure and you have the real total: $6.3 trillion, huge relative to the resources of the insurance fund.

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Asset prices aren’t going back to their highs of 2006-2007, so loans held against them will be generating losses for years. The FDIC may raise enough cash from banks to fund depositor losses in small and medium-sized banks, but it is clear that the biggest banks are far too large for them to handle.

As a result, the government’s emergency rescue measures aren’t going away for a while. And taxpayers should expect to be writing fat bailout checks to the financial system for years to come.


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A valuable synopsis with helpful graphics in support. We all need an untangling of all the news (particularly financial) that comes at us every day, a kind of Dummies Guide to What Happened Just Now, and you are doing the detail trawling that brings out the information we need to know. Thanks.

Posted by CB | Report as abusive

I had a nasty thought earlier today. Wouldn’t there be a kind of arbitrage going from banks paying lower to banks paying higher interest on CDARS segments? The retail investors would be getting the low interest rate at their home branch (assuming they will usually choose a safe bank), but then what’s to prevent the CDARS segments from seeking the higher interest rates at the riskier shops, with heaven knows who pocketing the difference.Has FDIC got a way to discourage the banks no their “bad” list from gorging on segments? You’d think that would be a horrible Moral Hazard for them.

Your numbers compared to the FDIC numbers of about $7 trillion total deposits as of 6/30/08 make me a little skeptical. I’m NOT saying you’re wrong, and I haven’t done any numbers myself, but 90% insured, even taking into account the unlimited transaction coverage and increase to 250k, seems high.Maybe the $7 trillion I’m using is too low?

Posted by Andrew | Report as abusive

Andrew….the $736 billion figure for TAG was published as part of the QBP. An FDIC spokesman confirmed that $725 billion is still a good estimate for the increase in insured deposits due to the new $250k limit for individuals.

Posted by Rolfe Winkler | Report as abusive

It’s all a big farce. What does it mean to replenish FDIC coffers? When the Fed can print money willy-nilly and give it to banks for free, premiums mean nada to most banks. They are just a conduit for funneling money from Fed to FDIC. Just like AIG funneled money from Fed & Treasury to GS and other investment and banking firms on Wall St. Another farce is the cash for clunkers program. The whole damn intervention creates just such farces.

Posted by dada | Report as abusive

Tough times for the good banks that did their job. They are getting creamed by the FDIC special assessments, so less money to lend. The bad banks are being liquidated too late so the FDIC has to pay too much. Bad planning.

Posted by Keating Willcox | Report as abusive

The PPIP program has been redesigned so that only “securitized” loans are covereed, not whole loans. In effect, this means that only big banks will benefit. Must be nice to have low friends in high places. In 2010 and 2011, commercial real estate resets will begin in ernest, and some estimates say upwards of half of the $2 trillion in these will tank, with smaller and medium sized banks disproportionally taking it on the chin. The FDIC isn’t going to be able to deal with this mess, nevermind the Option-A and other mortgage resets beginning next year as well. Oh well.. it’s just my children’s money, right ?

Posted by Friar Tuck | Report as abusive