Is Insolvency of FDIC Deposit Insurance Fund Possible?

CEOs of banks, both big and small, are seething with anger over proposed capital-raising measures by the FDIC.

The FDIC is being forced to replenish its insurance fund due to the anticipated surge of bank failures over the next couple of years.

The fund, which had $52.4 billion dollars in its coffers at the end of 2007, had been depleted to $18.9 billion dollars by the end of 2008.

This deposit insurance fund insures Americans' bank deposits up to $250,000 in the event of a bank failure.

If the number of failed banks starts to escalate (as is currently the case), then the deposit insurance fund will be depleted at a much quicker rate.

According to this recent article, the FDIC now "expects that bank failures will cost the insurance fund around $65 billion dollars through 2013". It becomes plainly obvious that the FDIC doesn't have enough money to cover this projected shortfall, and that they need to raise money from somewhere.

So they are planning on doing two things to raise funds:

1. Levy a one-time "emergency premium" on all federally insured institutions on September 30th, 2009. This fee will be 20 cents for every $100 in insured deposits that is held at an institution.

2. Raise regular insurance premiums to between 12-16 cents for every $100 in deposits, up from 12-14 cents.

Banks are pissed about these measures to raise money for the deposit fund, but FDIC Chairman Sheila Bair had some sobering words for the industry - without these proposed changes, the FDIC's deposit insurance fund could "become insolvent in a year".

She acknowledged that this will put a strain on banks at the absolute worst time, but that banks are meant to "fund the system", and not individual taxpayers.

The FDIC has access to a $30 billion dollar long-term credit line with the Treasury, but they are loathe to use it.

Small banks, in particular, have spoken out against the proposed premium increases (and one-time premium), saying that they would decimate their earnings and force them to scale back on their lending policies, at exactly the worst possible time for the economy.

They have been "flooding" the FDIC with letters, and are planning on enthusiastically arguing against the proposed changes.

I hear where they are coming from, however isn't this supposed to be a bank-funded system in the first place? What's the alternative? How else is the FDIC supposed to raise funds? Government bailout?

Again, the banking industry is going to have to cough up tens of billions of dollars to replenish the fund, but really - what's the alternative? Either they agree to the rate increases or taxpayers will need to fund the shortfall. In the end, banks are going to end up having to swallow this bitter pill.

Filed under: The Economic Meltdown