FDIC Insurance Fund Near Empty
Last week surprisingly saw no bank failures despite the fact that many banks are tottering on the edge of insolvency, such as Corus Bank. The reason the FDIC did not close more insolvent banks last week may be due to the fact that the FDIC Deposit Insurance Fund (DIF) is at dangerously low levels. One large banking failure could deplete the entire insurance fund and cause panic among bank depositors.
The FDIC has already publicly acknowledged that the DIF must not be allowed to fall to dangerously low levels when it proposed a 20 basis point emergency increase in its assessment on banking deposits.
The FDIC believes that it is important that the fund not decline to a level that could undermine public confidence in federal deposit insurance. 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.
Recent and anticipated failures of FDIC-insured institutions resulting from deterioration in banking and economic conditions have significantly increased losses to the Deposit Insurance Fund (the fund or the DIF). The reserve ratio of the DIF declined from 1.19 percent as of March 31, 2008, to 1.01 percent as of June 30, 0.76 percent as of September 30, and 0.40 percent (preliminary) as of December 31. Twenty-five institutions failed in 2008, and the FDIC projects a substantially higher rate of institution failures in the next few years, leading to a further decline in the reserve ratio.
However, given the FDIC’s estimated losses from projected institution failures, the assessment rates adopted in the final rule are not sufficient to return the fund reserve ratio to 1.15 percent within 7 years and are unlikely to prevent the DIF fund balance and reserve ratio from falling to near zero or becoming negative this year.
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.The FDIC projects that the reserve ratio will fall to close to zero or become negative in 2009 unless the FDIC receives more revenue than regular quarterly assessments will produce, given the rates adopted in the final rule on assessments.
Massive $500 Billion Line Of Credit Requested By FDIC
The FDIC insurance fund holds only $18 billion and could be depleted by one large banking failure. The FDIC is projecting a substantially higher bank failure rate over the next couple of years and admits that the DIF could be completed wiped out this year.
The FDIC views the line of credit at the Treasury as being available to cover “unforeseen losses”. If that is the case, then the FDIC must be expecting some potentially massive “unforeseen losses” since it is requesting an increase in the line of credit from the Treasury to $500 billion from the current $30 billion. This increased line of credit would be available to address “systemic risks” and potentially allow the FDIC to inject funds into banks that otherwise would face closure. The legislation allowing the increased line of credit was approved by the Senate in early May and should be finalized by both houses soon.
The FDIC has admitted that it cannot presently close more banks without depleting its insurance fund and potentially panicking the public. Once the FDIC is given full access to the $500 billion Treasury line, expect to quickly see many more bank closures this year.