savings

The FDIC deals with mounting bank failures

Highlights
  • The largest bank failure in the FDIC's history didn't cost the agency.
  • The FDIC has the authority to borrow up to $30 billion.
  • The FDIC recently raised premiums it charges banks.

Seventeen American banks have failed so far this year although, no doubt, that number will have risen by the time you read this. Unfortunately, we'll certainly double, if not triple or quadruple last year's 25 failures.

On a positive note, in only one instance this year has a failed bank not attracted an institution that wanted to scoop up its deposits, customers and a chunk of its assets. Nevertheless, every failure costs the Deposit Insurance Fund, or DIF, millions of dollars. That's the fund that backs up the Federal Deposit Insurance Corporation's promise to reimburse customers for every dime of insured deposits when an insured bank fails.

It's the cost that matters

The costs to the DIF this year have been so high -- and the year is so young -- that the estimate made by the FDIC late last year has been thrown away. At that time, the agency said it anticipated approximately $40 billion in losses from 2008 through 2013. The most recent revision puts losses from 2009 through 2013 at $65 billion.

"We never provide predictions as to the number of banks that equates to because it doesn't matter; what matters is the cost," says David Barr, FDIC spokesman. (Read his interview.)

"Look at Washington Mutual -- the largest bank failure we've ever had in our entire history, but the cost to the agency was zero. But we have smaller banks (where we're seeing loss rates) upward of 40 percent to 50 percent of total assets. We could handle all the Washington Mutuals we need to if they cost us zero. But if we keep seeing loss rates of 40 (percent) to 50 percent ,you can see it will really cost the agency. Even if you had 10 moderately sized banks go down, that would be a tremendous hit to the insurance fund."

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The FDIC is shutting banks every week, and the litany of news releases from the agency has some consumers wondering how long the FDIC's funding can support the losses. What's happening to our economy is unnerving, and banks are at the center of the crisis. Although no customer has lost a penny of insured deposits in the 75 years since FDIC insurance began, consumers are questioning how long that track record can last in light of these unprecedented events.

Increased borrowing authority

Just as you pay for various types of insurance coverage, banks pay premiums to the FDIC for insurance on their deposits. That money goes into the Deposit Insurance Fund and, when a member institution fails, the FDIC uses money from the fund if necessary. If failures exceed what's available in the DIF, the FDIC has the authority to borrow up to $30 billion from the U.S. Treasury. That line of credit was established in 1991 and the agency has tapped it only once -- in the early 1990s. The statute authorizing the line of credit requires that any money borrowed from the Treasury be repaid from industry assessments.

Banking industry assets have grown from $4.5 trillion to $13.6 trillion since 1991 when the $30 billion limit was set, according the FDIC. The agency is pushing Congress to increase its borrowing authority to better meet industry needs.

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