Problem Bank List Grows, Deposit Insurance Fund (DIF) Running On Empty

FDIC Quarterly Banking Profile 3/31/2009

The FDIC latest Quarterly Banking Profile, released today for the quarter ending March 31, 2009, showed another increase in the number of problem banks and a further large decrease in the FDIC Deposit Insurance Fund (DIF).  As of the latest quarter, the number of problem banks increased to 305 with $220 billion in assets, up from the year end 2008 quarterly numbers of 252 problem banks with $159 billion in assets.

The increase of problem banks on an annual basis is probably more indicative of the poor health of the US banking industry than the quarterly increase.  The number of problem banks increased from the year ago quarter by a stunning 239% (90 to 305) and the assets of problem banks increased by a huge 746% ($26 billion to $220 billion).

The graphical representation on problem assets and problem banks follows, courtesy of the FDIC.

Assets of Problem Banks

Number of FDIC Problem

Deposit Insurance Fund Nearly Exhausted

DIF Ratio - Percent of Insured Deposits

The FDIC has previously acknowledged that a very low DIF had the potential to cause concern among banking depositors.

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.

As of March 31, 2009, the DIF has fallen to the lowest level since March 1993.  During the first quarter 2009, the DIF decreased by 25% to only $13 billion.   Of the 8,246 FDIC insured banks, the DIF fund now provides protection for a total of $4.8 trillion in deposits.  One large banking failure could deplete the entire FDIC insurance fund.

DIF Worse Than It Seems

The FDIC report on the latest DIF reserve ratio is computed based on the old $100,000 deposit coverage limit.  Since the FDIC recently raised the deposit coverage limit to $250,000, the actual DIF ratio is probably at an all time low.  The total deposits of the 8,246 FDIC insured banks total $8.9 trillion meaning that the amount of FDIC insured deposits is certainly far larger than the $4.8 trillion reported by the FDIC, based on the increased deposit coverage limits.

FDIC losses on previous banking failures of 2009 often amounted to as much as 30% of the failed institution’s deposits.  If we apply a more conservative 25% loss ratio on the reported $220 billion of assets held by problem banks, the loss to the DIF fund could amount to $55 billion which would leave the DIF with a large deficit of $42 billion.  Of course, not all of the problem banks will fail, but many banks not on the problem banking list will probably fail as well - see Expert Predicts Up To 500 Banking Failures in 2009.

The FDIC has acknowledged that the DIF will probably be wiped out entirely and put into a negative balance during 2009.  The FDIC has already taken the necessary steps to protect depositor funds when the DIF is wiped out.  Congress has approved an increase in the FDIC line of credit with the Treasury of up to $500 billion and the FDIC has imposed a special assessment of 5 basis points on the banking industry’s insured deposits to help replenish the DIF.  Given the actions taken by the FDIC, depositors at this point should not have undue concerns about the safety of their deposits up to the insured limits.