FDIC May Borrow Money From Healthy Banks To Restore Insurance Fund

The New York Times (link below) is reporting that the FDIC (Federal Deposit Insurance Corporation) may take the unusual step of borrowing money from "healthy" banks in order to restore their depleted insurance fund.

The FDIC protects bank deposits via their deposit insurance. Every depositor at a bank is protected up to $250,000 by the FDIC in the event that the bank fails.

The FDIC collects fees from banks to help fund its deposit insurance account. When the economy is strong, there are very few bank failures and the deposit fund rises in value - when the economy is weak, there is a rising number of bank failures and the deposit fund starts to get depleted.

With the recent wave of bank failures in the United States, the FDIC has seen its deposit insurance fund sink to worrying levels. In order to replenish this fund, they are left with four options:

1. Raise the fees that they collect from banks.

2. Impose an emergency one-time assessment on banks.

3. Tap a $100 billion dollar credit line that the FDIC has with the Treasury.

4. Borrow money from banks.

Banks loathe the first two options, as this would mean that their earnings would take a hit.

Sheila Bair (head of the FDIC) loathes option number three, as this would mean going to the Treasury (and Timothy Geithner) for help. Apparently she does not want to do this under any circumstances.

So this leaves us with option 4 - borrowing money from healthy banks.

Banks and lobbyists are said to "strongly" support this plan. The reason? It wouldn't hurt their bottom lines.

The idea is this - the FDIC would borrow money from healthy banks in order to restore their depleted insurance fund.

The borrowed money would be used to rescue the "sickest" banks, and the FDIC would not need to a) raise rates or b) borrow money from the government.

When the economy starts to recover, the number of bank failures will drop, and the FDIC will start taking in more money than they pay out. They would then (presumably) be able to start repaying the loans that they have taken from the "healthy" banks.

It sounds as though the FDIC may very well go this route. I'll be interested to hear what the reaction from the public will be if this turns out to be true.

Source: NY Times - FDIC May Borrow Funds From Banks

Filed under: General Knowledge

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