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.”
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.
The FDIC reviews premium assessments quarterly and, to meet the increase in anticipated costs, it recently raised the premiums it assesses member banks and imposed a one-time special assessment of 20 cents on every $100 of deposits.
Community banks fired up
The assessment has infuriated community bankers. Camden Fine, president of the Independent Community Bankers of America, says the 20-cent assessment will cripple the nation’s 8,000 community banks. In an open letter to the industry, Fine claims community banks have played by the rules, and now will pay to bail out firms that did not.
“The very banks that are capable of dragging this country out of our economic turmoil, the banks that are doing all they can to give Main Street and rural America a hand up, got the back of their hand from their own government on the same day that Citi was getting a handout,” wrote Fine.
In a letter to Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Committee, FDIC chairman Sheila Bair wrote that the increased assessments are necessary because the agency’s current authority “provides a thin margin of error.”
Bair also wants Congress to pass the Depositor Protection Act of 2009, which will increase the FDIC’s borrowing authority to $100 billion. Additionally, it would temporarily authorize borrowing up to $500 billion during the current crisis. Bair says that if the borrowing authority is increased, the agency may be able to reduce the assessment.
In a related move, Rep. Barney Frank, D-Mass., has sponsored legislation permanently increasing deposit insurance coverage to $250,000 on non-retirement accounts.* Congress raised the FDIC insurance limit to $250,000 from $100,000 last October to give consumers more confidence in the banking system. The limit was due to revert to $100,000 Dec. 31, 2009. The $100,000 cap has been in effect since 1980 and has lagged inflation. The Bureau of Labor Statistics’ inflation calculator shows that $100,000 in 1980 dollars equals $256,241 today.
Make sure that the money you have in a bank is fully covered by FDIC insurance.
*Retirement accounts at banks and savings institutions have received deposit insurance protection up to $250,000 since April 1, 2006.
Read more about the FDIC in this Special section.