- Q3 numbers render the FDIC bankrupt
- The FDIC will have to tap into its $500 billion credit line with the Treasury
- Long-term measures should be taken to prevent future failure
Federal Deposit Insurance Corporation's (FDIC) deposit insurance reserve ratio has slumped in recent months, but the newest numbers present a new and more frightening situation. The third quarter DIF dropped to -0.16, rendering the FDIC bankrupt. Accordingly, the corporation will require federal government funds to continue to insure the nation's banking processes. Moreover, the outlook is worsened by the increase in banks on the "endangered" list, as the FDIC will surely be required to handle the default of these banks in coming months.
The dip occurred largely because of the failure of fifty banks worth $68.8 billion in Q3, a 19-year high. The ratio stood at 1.23 in March, but the large volume of failures set a significant decline in motion. Prior to the -0.16 ratio report, the 1992 -0.20 ratio stood as the largest in recent history.
The FDIC's $8.2 billion deficit essentially forces the federal government to infuse the corporation with funds. This creates an interesting situation. The federal government will take an increased interest in bank default after it becomes the institution responsible for handling failures. Also, it puts the government in further economic trouble, adding to the already-dire woes of the recession and recovery.
There are currently 552 banks on the FDIC's list of institutions with high risk of failure. With assets totaling around $346 billion, even a partial percentage of these banks failing would certainly place a great deal of pressure on the FDIC and the federal government. To combat this, the FDIC presented the plan to charge banks fees in advance to gather funds. As of yet, the plan has not been instituted. The FDIC has a reserve of $38.9 billion for bank failures in 2010, and has $45 billion on the way in the form of prepaid assessments accrued over three years. The DIF will then stand at $83.9 billion.
Compare this to the aforementioned $346 billion in assets of banks on the problem list and frightening prospects arise.
The federal government is in a precarious situation. Without a protection plan, the FDIC's diminished funds would cause a mass failure of banks, as funds would be pulled from banks predicted to fail. The consequences of this are obvious. Exacerbating the issue is the Fed's near-zero interest rate, as banks have big profits on their balance sheets while they may not actually be in such good shape. In addition, big banks are benefiting from government interaction while the rest of the banking industry suffers. The policies and subsidies have created what Westwood Capital LLC Managing Director Daniel Alpert calls "riskless profits" for big banks. This comes at the expense of smaller banks. If more banks fail than initially predicted, the fallout would be unprecedented.
The very nature of the FDIC can be blamed for getting the institution into such a mess. All banks pay a flat fee to be insured. It is not contingent upon liquidity or lending practices. Many believe that this system rewards or, at the very least, gives incentive for bankers to engage in irresponsible and highly speculatory practices. Tailoring these rates to the history and agenda of an institution could serve as a long-term fix to the current woes. In the short-term sense, the FDIC has no other viable options besides tapping into its $500 billion credit line with the Treasury.
