FDIC Seeks To Avoid Treasury Bailout

The FDIC Board of Directors will meet today to discuss the Deposit Insurance Fund Restoration Plan, assessments and funding.  As the number of banking failures continues to increase, it has become obvious that the current amount of reserves ($10.4 billion) in the FDIC deposit insurance fund (DIF) are totally inadequate to cover expected FDIC losses on future banking failures.

FDIC Chairman Sheila Bair has frequently expressed her concerns that a low or negative balance in the DIF could undermine public confidence in the deposit insurance program.

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.

Recently Ms Bair discussed the possibility of borrowing from the US Treasury to replenish the DIF fund, but this seems to be her last choice option.  The FDIC has consistently promoted the message that the deposit insurance program is funded entirely by banking industry assessments.  An FDIC request for a US Treasury loan would appear to be another “bailout” to a public already concerned by the size of the current banking industry bailout.  In addition, an FDIC bailout would raise serious questions about the health of the US banking industry.

Last quarter the FDIC levied a special assessment on the banking industry to help replenish the DIF but this measure has resulted in a backlash by a banking industry already under severe stress from a large number of loan defaults.  Other measures currently being considered are to have the banking industry prepay a special assessment or loan funds to the FDIC to replenish the DIF.

The latest FDIC Quarterly Banking Profile shows noncurrent loan growth continuing to expand at an alarming rate.  If this trend in defaults continues, many more banking failures will occur and the banks that do survive will be less able and willing to pay increased FDIC assessments.  Unless we see a rapid recovery in the economy and the banking industry, a bailout of the FDIC by the US Treasury seems inevitable.

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