FDIC's Deposit Insurance Fund Could Go Broke
The U.S. government has warned this week of a severely troubled deposit insurance fund that risks tanking this year amid rapidly mounting bank failures. "Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," wrote Federal Deposit Insurance Corp. chairman Sheila Bair, in a letter to chief executives Monday. Critics have said for months that the FDIC's deposit insurance fund just wasn't large enough to manage all the expected bank failures expected over the coming months and years -- and it seems they were right on the money. Senate Banking Committee Chairman Christopher Dodd, as of Friday, is moving to allow the FDIC to temporarily borrow up to $500 billion from the Treasury Department, after key officials, including Bair, made subtle cries for help. The FDIC's current line of credit with the Treasury is $30 billion. And interestingly, the FDIC has not borrowed money from the Treasury in over a decade. Dodd's bill could give the FDIC more power to address "systematic risks" in the economy, potentially creating another source of bailout funds in addition to the $700 billion already granted by Congress, according to a report by the Wall Street Journal. Bernanke said in a letter to Dodd in February that such a "mechanism would allow the FDIC to respond expeditiously to emergency situations that may involve substantial risk to the financial system," essentially granting the FDIC a "greater cushion of support," the American Bankers Association said in a statement. On Friday, the FDIC temporarily imposed higher premiums on banks in order to help keep the insurance fund solvent -- a move the ABA stressed it's "deeply concerned" about, as banks are already struggling to increase lending. However, Bair said the higher premiums were critical. The FDIC reported last week a collective loss -- comprised of losses by all commercial banks and savings institutions insured by the FDIC -- of 26.2 billion in the fourth quarter of 2008, marking its first quarterly loss since 1990. Twelve FDIC-insured institutions failed during the fourth quarter, while over the course of 2008, a total of 25 insured institutions failed. Much more ominously, the FDIC’s “Problem List” grew from 171 to 252 institutions in the fourth quarter, the largest number since mid-year 1995; HousingWire’s sources have consistently said the number of troubled banks is likely much higher than the disclosed total. As for 2009, the FDIC said it has set aside an additional 22 billion dollars for estimated losses on anticipated failures. Write to Kelly Curran at email@example.com. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.