FDIC Deposit Insurance Fund To Remain Underfunded Until 2017

The FDIC estimated today that the FDIC Deposit Insurance Fund (DIF), which protects depositors in the case of banking failures, will not return to the statutory minimum level required until the first quarter of 2017.   The largest number of banking failures in twenty years has depleted the DIF, even after the FDIC collected $46 billion in prepaid DIF assessments at the end of last year.   A total of 223 banking failures over the last two years has put the DIF into a negative reserve position.

The FDIC stated that the current DIF assessment rate it charges banks will remain the same throughout 2010 but will increase by 3 basis points effective January 1, 2011.  The FDIC Board currently anticipates that the DIF will return to a positive balance in 2012 but will not reach the level of 1.15% required by law until early 2017.   It seems remarkable that the FDIC could accurately forecast economic events seven years into the future after being unable to foresee one of the biggest banking crises in the nation’s history.

FDIC Chairman Bair stated that “I’m pleased to see that events thus far have unfolded much as we anticipated when we adopted this Restoration Plan — but we have a long way to go, and many uncertainties remain about the speed of economic recovery and our ultimate resolution costs. I’m hopeful about the prospects for the industry, and expect that we’ll see far fewer failures in 2011 than what we’re experiencing this year.”

The Chairman’s assessment is based on the FDIC’s projection of continued economic recovery.  If the economy does not cooperate, the expectation for fewer banking failures in 2011 may be much too optimistic, considering the large number of weak banking institutions.  In its last Quarterly Banking Profile, the FDIC’s number of Problem Banks increased by 10% to 775 institutions holding a total of $431 billion in assets.

Problem Bank assets increased by $28.4 billion over the previous quarter, reflecting the net addition of 73 banks to the Problem Bank List.  Although the largest banks have been reporting large profit increases and have increased their capital positions significantly, smaller and midsized banking institutions remain under duress.

The inadequacy of the FDIC DIF fund can be seen when compared to the amount of deposits it protects.  The FDIC’s latest report at March 31 shows the DIF reserve at negative $20.7 billion while insuring deposits of $5.5 trillion at 7,932 FDIC insured institutions.  In addition to providing deposit insurance, the FDIC has also guaranteed $618 billion of debt issued by banks under the Debt Guarantee Program (DGP)  and an additional $834 billion of deposits under the Transaction Account Guarantee Program (TAGP).  (Both the DGP and the TAGP are part of the Temporary Liquidity Guarantee Program (TLGP) established in October 2008.)   The FDIC has also guaranteed a large portion of $600 billion in assets that it received from failed banks as receiver, under loss-share agreements with acquiring banks.

The FDIC’s line of credit at the Treasury was increased in May 2009 to $100 billion from $30 billion.  The FDIC’s viewpoint on the line of credit with the Treasury was recently spelled out by the FDIC as follows:

Even though the FDIC has significant authority to borrow from the Treasury to cover losses, a fund balance and reserve ratio that are near zero or negative could create public confusion about the FDIC’s ability to move quickly to resolve problem institutions and protect insured depositors.  The FDIC views the Treasury line of credit as available to cover unforeseen losses, not as a source of financing projected losses.

Should extraordinary circumstances arise, the FDIC also has the authority to borrow up to $500 billion from the Treasury with the consent of both the Federal Reserve and the Treasury Department.

Deposit Insurance Fund Balance and Insured Deposits ($ millions)
Date      DIF Balance          DIF-Insured Deposits
3/07               50,745                    4,245,447
6/07               51,227                     4,235,314
9/07               51,754                     4,243,129
12/07             52,413                     4,292,940
3/08               52,843                     4,439,491
6/08               45,217                     4,468,240
9/08               34,588                     4,558,937
12/08             17,276                     4,775,133
3/09               13,007                     4,831,129
6/09               10,368                      4,817,614
9/09                -8,243                      5,304,695
12/09             -20,862                    5,392,677
3/10                -20,717                    5,462,644