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How the FDIC pays for bank failures

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The sting of those premium increases will be offset to some extent by the Federal Reserve's announcement that it will pay interest on the reserve funds that banks are required to maintain. The Fed had been slated to start paying interest on reserves Oct. 1, 2011. The Stabilization Act moved that date up to Oct. 1, 2008.

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Furthermore, in the second quarter of 2009, the FDIC wants to increase assessments to institutions that rely heavily on secured liabilities and brokered deposits.

"It would include charging banks more if they have brokered deposits or secured borrowings, and then possibly giving banks a little extra credit if they have unsecured borrowing," say David Barr, FDIC spokesman. "Unsecured borrowings can actually decrease the cost of bank failures because the losses associated with the failure are shared with the unsecured debtors."

In addition to raising premiums and the previously mentioned borrowing authority which is, essentially, a line of credit at Treasury, the FDIC has a second line of credit at Treasury that can be called upon, Barr says.

"We have a separate borrowing authority for what we call working capital. When banks fail, the FDIC retains assets from those banks. These tend to be illiquid assets such as physical properties or hard-to-sell loans. Since a lot of our money could be tied up in these illiquid assets, we have borrowing authority from the Treasury for working capital. It's meant to be short-term borrowing and it would be repaid as the FDIC sells the assets."

Not the worst banking crisis
As awful as the overall financial picture is today, the situation in the banking industry was considerably more dire 20 years ago during the savings and loan crisis.

There are 117 banks on the FDIC's current "watch list;" about 2 percent of the FDIC-insured banks nationwide. In 1987 there were 2,165 institutions, or 12 percent, on the list. There have been 13 bank failures so far this year. In 1989, 534 institutions failed.

Institutions on the watch list are in financial trouble and are receiving increased scrutiny by the regulatory agencies. It's important to note that, historically, only about 13 percent of the banks on the list have failed.

"We were in triple-digit bank failures for four or five years (back then) and we're still here," says Barr. "The FDIC, and the banking industry, is facing this economic downturn from a position of strength. Ninety-eight percent of the banks are well capitalized. That's the highest level of capital in the regulatory arena.

"At one point we had $52 billion in our insurance fund. That's the most we've ever had to help resolve troubled institutions. It's down to $45 billion, but that's taking into account IndyMac, Washington Mutual and Wachovia (original agreement with Citi). So, getting those behind us and still having $45 billion, that's a strong position and we're going to bolster it by proposed premium increases. We're here to protect depositors -- it's what we've been doing for 75 years. Not a single customer has lost a penny of insured money and they never will."

The moral to this is, don't worry about the FDIC. Just make sure that your deposits are insured.

Bankrate.com's corrections policy -- Posted: Oct. 10, 2008
 
 
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