It's a good example of why, for the most part, we're having success finding people to step forward and take over failing banks from us. It's the power of a receivership. With a receivership, certain things are known. If you want to enter a new market or increase your market share, you have basically two alternatives -- do it on your own or buy a failing institution from the FDIC. If you do it on your own and you merge with another bank, you take on all of that bank's problems -- problem loans, contingent liabilities, potential lawsuits, all the bills, subordinated debt -- everything.
(But) if you buy it from the FDIC through a failed-bank basis, the receivership is like a cleansing process. All the problems that caused that bank to fail can be left behind with the receiver. All the contingent liabilities, all the potential lawsuits, left behind. You essentially are assuming a clean bank.
Or if you do what we've been doing with some other institutions -- even if you take on all the assets -- the ability through the receivership to wrap certain assets in a loss-share agreement and to actually know what your ultimate loss of those assets will be -- it's essentially a guarantee that your loss will be X amount at the outside on this failed bank's assets. That's a guarantee you can't get if you're buying a bank on your own.
Is the FDIC in danger of running out of money?
We feel that we have adequate resources both human and monetary to handle the failures out there. At the beginning of this year, for the first quarter of 2009, the FDIC increased the amount banks pay for deposit insurance. We increased the rate again for the second quarter, and we imposed a one-time special assessment on banks. So with the special assessment and the premium structure that the board has approved, we anticipate bringing $27 billion into the insurance fund this year.
At the end of 2008, the insurance fund stood at just about $19 billion. So that's a tremendous amount of resources. Yes, the fund did decrease from about $36 billion down to about $19 billion from the third quarter to the end of the year, but that not only takes into consideration the cost of the bank failures in 2008 but every quarter the FDIC places money aside for future failures.
We look at the landscape and try to predict in the foreseeable future the amount of bank failures coming down the pike and what it will cost us, and we set aside money for future losses before banks even fail. So just because the amount of the insurance fund decreases, doesn't mean that that cash is gone. If those bank failures never materialize, that money gets taken out of reserve and put back into the insurance fund. It's like banks set aside reserves for bad loans. If they experience those losses, they've got that reserve. If they never experience those losses, they can begin to take that money out.
If losses continue, the board can increase the amount banks pay and we can impose special assessments on the industry. Our chairman and our board have indicated that they feel that the banks have the capacity to absorb higher premiums. It's extremely important for the banking industry to take on the losses of bank failures as opposed to turning to taxpayers for money.
The FDIC has a $30 billion line of credit from Treasury, but at this point we don't see the need to tap that credit yet. We like to use that as a line of last resort. Whenever you start taking taxpayer money -- banks right now are not taxpayer funded and once you start taking taxpayer money, banks open themselves up to a lot more scrutiny because now they're dealing with taxpayer money as opposed to their own money.