Another Mess Taking Shape - Bank Deposit Insurance

by: Michael Panzner

When it comes to government guarantees, Washington's attitude has been "out of sight, out of mind." As long as the programs taxpayers are underwriting appear to be self-sustaining -- which is often the case where pay-as-you-go accounting is involved, until suddenly it all blows up -- then those in charge don't concern themselves with the details.

Of course, such a short-sighted approach virtually assures that things will go wrong, because it discourages long-range planning that can identify serious vulnerabilities, and it undermines attempts to boost premiums and reserves as risks increase.

In the end, however, reality wins out and the chickens come home to roost. We've already seen that happen in the case of government-sponsored enterprises like Fannie Mae (FNM) and Freddie Mac (FRE). In "The Coming Deposit Insurance Bailout," the Wall Street Journal highlights another area where a major mess seems to be taking shape.

Another lesson that federal guarantees aren't free.

Americans are about to re-learn that bank deposit insurance isn't free, even as Washington is doing its best to delay the coming bailout. The banking system and the federal fisc would both be better off in the long run if the political class owned up to the reality.

We're referring to the federal deposit insurance fund, which has been shrinking faster than reservoirs in the California drought. The Federal Deposit Insurance Corp. reported late last week that the fund that insures some $4.5 trillion in U.S. bank deposits fell to $10.4 billion at the end of June, as the list of failing banks continues to grow. The fund was $45.2 billion a year ago, when regulators told us all was well and there was no need to take precautions to shore up the fund.

The FDIC has since had to buttress the fund with a $5.6 billion special levy on top of the regular fees that banks already pay for the federal guarantee. This has further drained bank capital, even as regulators say the banking system desperately needs more capital. Everyone now assumes the FDIC will hit banks with yet another special insurance fee in anticipation of even more bank losses. The feds would rather execute this bizarre dodge of weakening the same banks they claim must get stronger rather than admit that they'll have to tap the taxpayers who are the ultimate deposit insurers.