FDIC Fund Strained by Bank Failures May Have to Raise Bank Premiums

August 10, 2008 by · Leave a Comment
Filed under: Industry News 

If you looked at the FDIC’s balance sheet then this is a logical outcome of the amount in the bank insurance fund and the number of banks on the “watch list”.  I believe there is more banks in bad shape than is reported so it is good they are being pro-active to increase  the amount of money in the deposit insurance fund.

If we get anywhere close to the number of banks that failed during the Savings and Loan crisis then this could become a difficult situation where if the FDIC is out of money we could actually monetize those losses and create more inflation.  We are on a slippery slope and I hope our leaders can produce the answers we need to not put us in a worse situation.

Article:

The failure of IndyMac and seven other banks this year may erase as much as 17 percent of a government insurance fund and raise premiums for all banks, from Franklin National of Minneapolis to Bank of America Corp.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the fund $4 billion to $8 billion, in addition to an estimated $1.16 billion for seven closures through Aug. 1. Premiums for deposit insurance will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision on the increase is due by the fourth quarter.

“It’s going to be a bloody, expensive mess for the banking industry,” said Bert Ely, president of Ely & Co. Inc., a bank consulting firm based in Alexandria, Virginia. “Healthy banks are paying for the mistakes made by failed banks.”

The pace of bank closings is accelerating as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC’s “problem” bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

The FDIC estimated its shutdown of California-based mortgage lender IndyMac might drain as much as 15 percent from the fund. Seven other banks will take about $1.16 billion, or about 2 percent.

The potential $9.16 billion in withdrawals would be the highest since the insurance account was created in 1933, Diane Ellis, the FDIC’s associate director of financial-risk management, said in a telephone interview. The savings-and-loan collapse pulled a then-record $6.9 billion in 1988, Ellis said.

Replenishing

The FDIC is required to shore up the fund when the reserve ratio, or the balance divided by the insured deposits, slips below 1.15 percent or is forecast to fall below that level within six months. A 2006 law directs the agency to take steps to reach the 1.15 percent ratio within five years.

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