Banks should pay for FDIC fund

September 22, 2009

The banking system is still suffocating under the weight of bad loans, and it’s well known that the FDIC doesn’t have enough cash to deal with the problem.

What to do? According to a plan floated in the New York Times, FDIC may borrow from the banks themselves in order to replenish its Deposit Insurance Fund.

The optics may be good, but don’t be fooled. The plan would be another balance sheet gimmick to paper over losses.

The FDIC itself is throwing cold water on the idea. Andrew Gray, FDIC’s director of public affairs, says that “although this plan is an option, it’s not being given serious consideration.”

That leaves Sheila Bair with two unpopular options to replenish the Deposit Insurance Fund, which had just over $40 billion in reserve at the end of the second quarter.

One approach — the right one — would be to charge special assessments on banks themselves. FDIC insurance is the best marketing tool in American finance, and for too long banks paid next to nothing for it.

The other option is to borrow from taxpayers. Earlier this year the FDIC secured a $400 billion emergency line of credit at Treasury to go with the $100 billion line it already had.

To her credit, Sheila Bair has been very reluctant to tap Treasury. She’d prefer that bank shareholders and creditors absorb the cost of failure. In the meantime, she’s charging banks special assessments to replenish the insurance fund.

Before the end of September, Bair has to decide whether she’ll charge banks another special assessment in the third quarter.

Banks would prefer that she not do so, and have apparently floated a plan to offer themselves as lenders to the FDIC as an alternative.

It’s an accounting gimmick, and a pretty simple one at that. Banks would replenish the Deposit Insurance Fund, but from the asset side of their balance sheet, buying bonds issued by the FDIC, rather than paying large “special” assessments directly out of earnings.

Theoretically, banks themselves would pay back the FDIC’s bonds, but in smaller amounts that FDIC assesses over time. In the meantime, because their capital levels aren’t reduced, banks can continue to lend. More lending will spur “recovery,” and banks will eventually earn their way out of trouble. Or so their argument goes.

The idea that more lending is going to help us recover from a credit binge is itself laughable. But the bigger issue is the size of losses that are festering on bank balance sheets. The losses are so large that normal assessments are unlikely to be able to cover them.

But banks don’t want to admit to their losses. They’d prefer to extend and pretend in order to avoid the kind of wholesale restructuring that is necessary to repair the financial system’s balance sheet.
And in any case this plan most likely wouldn’t spur lending into the real economy. It may actually cause lending to contract.

Right now banks have hundreds of billions of excess reserves parked at the Fed earning an interest rate of just 0.25 percent. Presumably FDIC-backed bonds would pay better.

So besides avoiding the pain of special assessments, banks would have a new, more profitable place to park reserves.

Sheila Bair should ignore such delaying tactics floated by banks and order them to pay more special assessments into the Deposit Insurance Fund.

To emerge from the financial crisis in better shape, we need to shrink the financial sector. An important way to do that is to reduce the return on equity available to bank shareholders. Charging banks appropriate fees for deposit insurance can help achieve that.


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Robbing Peter to pay Paul. Only Paul got bailed out by Peter. Circular logic and taxpayer fraud. Is the FDIC broke? If so takeover all banking assets and fire all the bums, evict the banksters in the whitehouse.

Posted by Elizabeth | Report as abusive

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Posted by Bob Grenjr | Report as abusive

[…] "Socialism"This says Obama created a sop for business at the expense of the middle class.Rolfe Winkler ยป Banks should pay for FDIC fundA provocative ’shrink the financial sector’ take on the FDIC’s dilemma.Google […]

Posted by News from around the web: 2009-09-23 – Credit Writedowns | Report as abusive

The idea of an insurer borrowing from those it insures is mind-bogglingly stupid. The fact that they’re even considering it adds to my already huge doubts.

Posted by Adam Sharp | Report as abusive

It’s not stupid at all. If it weren’t such bad press it would make sense.

Rolfe would point out that it would be an indirect gov’t bailout because the banks that would have the ability to lend to the FDIC would likely be benefiting from other gov’t policies, and he’d be right.

Posted by Andrew | Report as abusive

This is a great idea. There are some very strong banks that are being punished by the actions of those banks that stretched the rules and took avantage of a lack of regulatory foresight. Selling bonds to strong banks will allow the FDIC to leverage the strenght of these bank instead of punishing them by taking away their capital. Special assessments are expensive and will push banks already struggling to survive over the edge, requiring more funds from the FDIC.

Posted by Glenn | Report as abusive

But that’s the point Glenn. If banks can’t survive when they have to pay an appropriate price for deposit insurance, then they shouldn’t be in business at all.

People say that’s a bad thing because it will “reduce lending.” But reduced lending, i.e. de-leveraging the economy, is precisely what we need to put ourselves on a more stable economic foundation.

We’ve not even begun to de-lever. Those who advocate pumping more credit into the economy in order to fix what ails us don’t understand the dynamics of a credit-based system.

Posted by Rolfe Winkler | Report as abusive

To label the FDIC a “marketing tool” is to suspend moral judgment — in principle not unlike advocating immunity for frauds like Maddof.

The FDIC is fraudulent insurance. It’s a systemic moral hazard which rewards the reckless at the expense of the prudent. Its function is to perpetuate central banking by conning depositors into the false belief that they can suspend their own independent judgment of banks and currency.

Exchange presupposes production, and production requires savings. So for an economy to survive, its money must be a store of value which is objective – i.e., determined voluntarily among buyers and sellers to mutual advantage. Otherwise, we continue converting our irreplaceable time and production into government monopoly money whose value is subjective – i.e. , arbitrarily determined at 6-week intervals by dilettantes whose function is to facilitate government theft of our time and production. For centuries, central banking’s record is consistent and inevitable: the destruction of savings and liquidation of countries.

The full solution is free banking – where money is privately issued and objectively valued – as in the 19th century US – except without the relatively few state and national interventions that created the relatively few panics. An interim solution would be to make the existing monetary base ($3T) redeemable in existing US government-held gold (250M ounces at $12k per ounce). Only when the possibility of systemic theft is eliminated (as only gold-backing can do), will recessions, inflation and deflation end. Only then will every producer in the country be free to create real, sustainable growth.

Posted by Peter Murphy | Report as abusive

I agree there are a lot of banks out there that need to go away and this will have minimal affect on over all lending for these banks simply don’t have the funds to lend to begin with.

The availability and expection of easy credit has allowed prices to climb faster then incomes. This was great for the ecomomy on the way up, but now the debt burden on consumers has gotten too big. There is no room for an income hic-up or prices to continue to climb as the consumer simply can’t afford it anymore. This de-leveraging is needed and will continue to be painful for some time.

However to help the FDIC get the temporary funds it needs to get through this period, selling bonds to healthy banks would be better than then borrowing from the Treasury or another special assessment. The FDIC gets the funds it needs at a fair price that will utimately be paid by regular assessments on all banks; healthy banks get a low-risk investment alternative at a time when Fed Funds and Treasury alternatives are next to nothing. I don’t see a negative affect on the consumer.

Posted by Glenn | Report as abusive