FDIC Running Out of Cash
The FDIC is estimated it will need $70 billion to cover bank failures through 2013 — about 5X recent cash holdings of $13 billion. Through March 2009, the FDIC recorded over $19 billion in losses. The most recent failure is Texas Guaranty Bank, at a cost to the agency’s insurance fund of $3 billion dollars.
The FDIC is one of those rare regulatory agencies that operates, for the vast majority of the time, without taxpayer funding. Bank fees pay for the insurance of the Federal Deposit guarantees.
Given the enormous increase in bank failures — some estimates are for more than 300 this year — we will very likely see some taxpayer support of the deposit insurer.
This was all but inevitable:
“The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.
That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest. The government agency that guarantees depositors against the loss of their money in a bank failure may need its own lifeline.
The FDIC on Thursday will disclose how much is left in its insurance fund, and update the number of banks on its list of troubled institutions. That number shot up to 305 in the first quarter — the highest since 1994 and up from 252 late last year. FDIC Chairman Sheila Bair may also use the quarterly briefing to discuss how the agency plans to shore up its accounts.”
This was in no small part behind the FDIC decision to make it easier for private equity to acquire failed banks at distressed prices. There are that many fewer large banks who are potential buyers. Hence, the new rules allow private equity buyers to maintain a failed bank’s reserves “at levels equal to 10 percent of its assets.” Prior rules set a higher requirement, and mandated new owners maintaining a bank’s minimum capital levels for three years.
The theory is that softening these requirements will attract the attention of more potential buyers, bringing in fresh capital to the FDIC.
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Previously:
How Over-Extended is FDIC Insurance ? (April 6th, 2009)
http://www.ritholtz.com/blog/2009/04/how-over-extended-is-fdic-insurance/
Source:
Hammered by bank failures, FDIC may need to draw cash from banks or government STEVENSON JACOBS
AP Business, August 26, 2009 | 9:48 p.m
http://www.latimes.com/business/nationworld/wire/sns-ap-us-fdic-shrinking-fund,0,1644675.story
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August 27th, 2009 at 7:47 am
old story but still up-to-date
http://www.securagroup.com/news/archives/articles/2008/AB080827.pdf
When I became Chairman of the FDIC in 1981, the FDIC’s financial statement showed a
balance at the U.S. Treasury of some $11 billion. I decided it would be a real treat to see all of
that money, so I placed a call to Treasury Secretary Don Regan:
Isaac: Don, I’d like to come over to look at the money.
Regan: What money?
Isaac: You know . . . the $11 billion the FDIC has in the vault at Treasury.
Regan: Uh, well you see Bill, ah, that’s a bit of a problem.
Isaac: I know you’re busy. I don’t need to do it right away.
Regan: Well . . . it’s not a question of timing . . . I don’t know quite how to put this,
but we don’t have the money.
Isaac: Right . . . ha ha.
Regan: No, really. The banks have been paying money to the FDIC, the FDIC has
been turning the money over to the Treasury, and the Treasury has been
spending it on missiles, school lunches, water projects, and the like. The
money’s gone.
Isaac: But it says right here on this financial statement that we have over $11 billion
at the Treasury.
Regan: In a sense, you do. You see, we owe that money to the FDIC, and we pay
interest on it.
Isaac: I know this might sound pretty far-fetched, but what would happen if we
should need a few billion to handle a bank failure?
Regan: That’s easy we’d go right out and borrow it. You’d have the money in no
time . . . same day service most days.
Isaac: Let me see if I’ve got this straight. The money the banks thought they were
storing up for the past half century sort of saving it for a rainy day is gone.
If a storm begins brewing and we need the money, Treasury will have to
borrow it. Is that about it?
Regan: Yep.
Isaac: Just one more thing, while I’ve got you. Why do we bother pretending there’s
a fund?
Regan: I’m sorry, Bill,
August 27th, 2009 at 8:15 am
Run out of cash? Impossible! Printing press is running 24/7. Actually they don’t even need the real money. Just have to electronically credit their account and voila!
August 27th, 2009 at 8:38 am
Don’t the FDIC have a $500 billion credit line with the Treasury, loans not bailouts.
I wonder at which point will we have a no risk take-over program of failed banks with the FDIC matching dollar for dollar, maybe the Chinese will get a few of those also.
This is the land of Oz anyway, like cynic says, you don’t have it, just make it up.
August 27th, 2009 at 8:41 am
$70B is a fraction of what CITI and AIG got.
This chatter about FDIC running out of funds to cover bank failures could incite some bank runs no? Just gotta get your money into the 19 TBTFs.
“Save with us, we’re too big to fail”!
August 27th, 2009 at 8:41 am
PBGC is next!
August 27th, 2009 at 8:51 am
FDIC was footing part of the bill for the TBTFs along with Treasury and Fed? Aside from the beauty of muddying accountability why was FDIC committing funds to banks that wouldn’t fail and leaving themselves short to cover the upcoming wave of failures?
Treasury & Fed didn’t need the FDIC contribs, I think there was just a desire to give an aura of respectability to these bailouts and like I said “muddy” the accountability. Whose decision was this? “ours” not “mine”, nobody is accountable for a committee decision!
As a bonus the TBTF are in a position to cherry pick any of the upcoming small mid bank failures because they can get more Fed bucks easier than FDIC.
August 27th, 2009 at 9:00 am
Mish has been blogging for a couple of weeks now how the FDIC is already out of money.
http://globaleconomicanalysis.blogspot.com/2009/08/as-of-friday-august-14-2009-fdic-is.html
But hey, they have a line of credit with the Treasury, so really, they can deal with an infinite amount of bankl failures. YAY!
August 27th, 2009 at 9:06 am
This chart from April was instructive
How Over-Extended is FDIC Insurance ? (April 6th, 2009)
http://www.ritholtz.com/blog/2009/04/how-over-extended-is-fdic-insurance/
August 27th, 2009 at 9:08 am
Strange that the agency that protects middle-America’s savings accounts, seems to have to be out begging for money to continue their job, while money can be found (read that as printed) to save the bacon of the fat cat financial institutions after their mismanagement. Nothing has changed; the rich, fully supported by the politicians, still run this country and just may be running it into the ground. GREED REIGNS!
August 27th, 2009 at 9:42 am
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August 27th, 2009 at 11:26 am
i wonder id this is related to the problems many states are having with their unemployment funds. in good time companies pushed hard to reduce the premiums, but now they are running out of cash to make the payments. and are looking at having to borrow money from the feds and or make additional assessments against business. sounds like the banksters did the same thing, cut their premiums in good times, bad since the bad times are here the funds can’t afford the failures that the banksters engineered
August 27th, 2009 at 1:28 pm
I know that it’s water under the bridge but they should have let the insolvent banks fail to begin with. In the end this is going to cost us much more than several trillion dollars.
August 27th, 2009 at 2:39 pm
maybe so, but that would only have bankrupted the FDIC with only one of them. and then the bank runs would have started taking every other bank with them. just like in the GD
August 27th, 2009 at 2:50 pm
Barry, I think its time to do a “What does the initials FDIC really stand for” similar to your post about UBS. Let me nominate a few…Forever Dicking Investors in Circles….Failure Discontinuing Incapable Centersofmoney…Four Dollars In Coffers (needed)….F*** Dis, Invest-in Creditunions….I’m sure there are more to come….
August 27th, 2009 at 10:29 pm
F*** Da Ignorant Commoner
August 27th, 2009 at 11:25 pm
BWAAAAHAHAHA! That was awesome goldsifter!
August 28th, 2009 at 7:50 am
As usual these stories about the FDIC and its fund are completely wrong. Th FDIC has absolutely no cash of its own; it is not an insurer with capital and funds etc.
it is merely the administrator of a pay-as-you-go captive self-insurer for deposit-taking institutions. The capital of all deposit taking banks backs the deposits of any deposit-taking bank (jointly, but I think not severally).
The so called FDIC fund is just an account into which deposit taking banks pay advances on future losses. The advances are not the end of their liabilities to depositors — the liability of all banks to depositors is unlimited as the FDIC can charge non-failed banks whatever it takes to make depositors whole at failed banks.
The FDIC may borrow money from the Treasury only to spread out the
payments from non-failed member banks to depositors of failed member
banks.
http://www.fdic.gov/news/news/press/2008/pr08084.html
«As per our authorizing statute, any money we might borrow from the Treasury must be paid back from industry assessments.»
«The fund is 100 percent industry-backed. Our ability to raise premiums essentially means that the capital of the entire banking industry – that’s $1.3 trillion – is available for support.»
«The FDIC receives no federal tax dollars – insured financial institutions fund its operations.»
August 28th, 2009 at 8:31 am
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