How Will the FDIC Replenish Its Deposit Insurance Fund?

The FDIC (Federal Deposit Insurance Corporation), which is the US government corporation that is charged which guaranteeing the safety of deposits at member banks, is out of money.

So why is the FDIC suddenly in such a rough spot? It's a pretty simple formula. Bank failures have spiked as a result of the "Great Recession", and the FDIC has had to shell out tens of billions of dollars to make the depositors of the failed banks whole.

That's the FDIC's role - they collect premiums from banks, and in return, protect the deposits (up to a certain amount) of the bank's customers.

If a bank fails, then the FDIC steps in and makes sure that depositors are guaranteed their funds, up to $250,000. This insurance helps to calm citizens in times of great economic turmoil and to prevent any massive bank runs.

When the economy is strong, there are few bank failures, and the amount of money in the FDIC insurance fund rises.

When the economy is weak, there are a greater number of bank failures, and the balance of the FDIC insurance fund starts to dwindle.

As of right now, the FDIC insurance fund is at a negative balance. At the beginning of the crisis, the FDIC had over $50 billion dollars at its disposal.

Straight from the horse's mouth:

"..staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative".

Now, the FDIC still has cash on hand, but when you take into account "provisioning for anticipated failures", they have a negative balance.

The FDIC does have numerous ways of raising funds though.

Instead of drawing from a large credit line with the Treasury, the FDIC is proposing that banks prepay their estimated annual assessments ahead of time for Q4 2009, 2010, 2011 and 2012.

The FDIC estimates that this would raise approximately $45 billion dollars in funds that would be used to replenish the insurance fund.

Some of the other options that the FDIC was considering (or could have considered) included: borrowing from the Treasury, borrowing money straight from banks or imposing another special assessment.

It should be interesting to see how the FDIC plans on preventing this situation from reoccuring in the future without pissing off the banks.

How do you feel knowing that the government corporation that is responsible for insuring your deposits is out of cash?

Source: New York Times - Banks to Prepay Assessments to Rescue FDIC

Filed under: The Economic Meltdown