New episode of dark drama: FDIC needs bailout itself?
September 9, 2008
U.S. credit crunch has lasted more than a year during which it had created dramatic stories. There were the defenestration at Citigroup and Merrill Lynch late last year; then, in March, the Bear Stearns fiasco and the humbling of UBS; and Fannie Mae and Freddie Mac takeover by the Treasury Department on September 7th. What is the next episode after the remarkable rescue of Fannie and Freddie?
With the tragedy of the mortgage giants’ bailout closing, another dark drama of U.S. commercial banks is beginning. On August 26th the Federal Deposit Insurance Corporation (FDIC) announced a rise in the number of trouble banks on its danger list to 117, from 90 at the end of the first quarter. The number represents 1.5 percent of the total 8,000 banks operating in the United States. That's the most that have been on the list since 2003, and more are expected to join it as credit problems worsen, according to FDIC chairman Sheila C. Bair.
In 1933 FDIC is created by U.S. congress as an independent deposit insurance agency to maintain stability and public confidence in the nation's banking system. It insures consumer deposits in a bank or savings and loan for up to $100,000 per account. Deposits include checking and savings accounts and certificates of deposit.
Eleven banks have failed so far this year, knocked by sloppy lending to homeowners and developers. The latest failure came on September 5th, when the Federal Deposit Insurance Corporation seized control of Silver State Bank, Nevada. Institutional Risk Analytics, which monitors the health of banks, expects more than 100 lenders to fold over the next year alone.
The FDIC will soon have to replenish its deposit-insurance fund, which collects premiums from banks and stood at around $53 billion before the downturn. One of this year’s failures, IndyMac, has alone depleted the fund’s coffers by one-sixth. The series of bank closure have pushed the fund’s holdings below a trigger point that requires the FDIC to craft a “restoration” plan within 90 days. The fund could get more squeezed if nervous savers began to move even insured deposits away from banks they perceived to be at risk.
In the worst scenario, if all 117 banks in the problem list fail, the FDIC will be insolvent. When that happens, Congress will have to step in to avoid massive runs on the banks.
Federal Deposit Insurance Corporation has indicated that banks with risky profiles will be asked to pay higher premiums than the current amount which is up to ten times more than the typical five cents per $100 insured. This would ensure that safer banks are not unfairly burdened. But it will heap yet more financial pressure on strugglers.