Article Highlights:
- FDIC funds are depleted.
- Several options are available for replenishment.
- Regulators to meet on September 29th to discuss options.
The dire condition of the Federal Deposit Insurance Corporation (FDIC) continues to spark debate in the financial world. Bank failures have left the corporation with a depleted fund, a danger to both banks and any entity doing business with them.
While the economy seems to be rebounding, the FDIC’s projected losses are harrowing. Within the next five years, experts predict a net $70 billion in losses, most of which stand to occur in 2009 and 2010. The initial figure was $65 billion, an astronomical figure given the fact that the fund fell from $45 billion to $10.4 billion at the end of the second quarter.
Bank failures reached an apex this year—94 U.S. banks required FDIC funds due to collapse, up from 25 in 2008 and 3 in 2007. Congress also played a major role in contributing to the downfall of the FDIC. Up until 2006, laws prohibited the corporation from assessing premiums to certain banks. The banks that were declared low-risk—that is, management was universally regarded as strong and capital was high—were immune to protection premiums. These “standards” failed, as firms like Lehman Brothers demonstrated.
In moving forward, the FDIC is left with limited options in staying afloat. While it has $32 billion in “reserves” to handle the coming year’s failures, these funds will surely wither quickly. The corporation issued a notice on September 23 setting a date, September 29, for regulators to meet to discuss the source of a recovery package.
Taxpayers are cringing at the thought of another federal bailout. The FDIC has a $500 billion line of credit with the Treasury, a substantial amount that could be utilized to rebuild the deposit insurance fund. However, many question the repayment of this package given the projected losses. As per the most recent list, which is to be updated at the September 29 meeting, 416 banks are of “problem” status—a 15-year high. The risk the FDIC runs in borrowing taxpayer money is evident.
The other forerunning option is to borrow directly from banks that are currently “stable.” Many, including House Financial Services Committee chairman Barney Frank, see this as a worse idea than borrowing directly from taxpayers. Many of the “well-capitalized” banks that would be sources of loans also received Troubled Asset Relief Program (TARP) funds and some have yet to pay them back. Frank and others cite a lack of transparency in using this system.
However, the FDIC should avoid directly borrowing from taxpayers wherever possible. Instead, they should focus on borrowing from banks that have repaid the TARP funds (Morgan Stanley, Goldman Sachs, etc.). The reasoning is two-fold. Consumer confidence often relies heavily on how taxpayer money is being handled. A faltering system relying on money from taxpayers indicates a difficult economic situation and causes hesitation in individual spending. Secondly, a dangerous trend has arisen from the recession. Big banks and the auto industry caused great unrest in taking funds from the Treasury, and renewing the process with a “federal corporation” is sure to cause a great deal of unrest.
Perhaps the best option for the FDIC is to levy higher premiums and fees on banks, especially those that are well-capitalized. While some argue that this would not provide the necessary funding, the “problem list” is undoubtedly comprised of smaller firms that would not require as much insurance funding as banks like Goldman Sachs, who turned outstandingly high profits in the past year.
