Funding FDIC: Why Banks Should Pay

The banking system is still suffocating under the weight of bad loans, and it’s well known that the FDIC doesn’t have enough cash to deal with the problem.

What to do? According to a plan floated in the New York Times, FDIC may borrow from the banks themselves in order to replenish its Deposit Insurance Fund.

The optics may be good, but don’t be fooled. The plan would be another balance sheet gimmick to paper over losses.

The FDIC itself is throwing cold water on the idea. Andrew Gray, FDIC’s director of public affairs, says that “although this plan is an option, it’s not being given serious consideration.”

That leaves Sheila Bair with two unpopular options to replenish the Deposit Insurance Fund, which had just over $40 billion in reserve at the end of the second quarter.

One approach — the right one — would be to charge special assessments on banks themselves. FDIC insurance is the best marketing tool in American finance, and for too long banks paid next to nothing for it.

The other option is to borrow from taxpayers. Earlier this year the FDIC secured a $400 billion emergency line of credit at Treasury to go with the $100 billion line it already had.

To her credit, Sheila Bair has been very reluctant to tap Treasury. She’d prefer that bank shareholders and creditors absorb the cost of failure. In the meantime, she’s charging banks special assessments to replenish the insurance fund.

Before the end of September, Bair has to decide whether she’ll charge banks another special assessment in the third quarter.

Banks would prefer that she not do so, and have apparently floated a plan to offer themselves as lenders to the FDIC as an alternative.

It’s an accounting gimmick, and a pretty simple one at that. Banks would replenish the Deposit Insurance Fund, but from the asset side of their balance sheet, buying bonds issued by the FDIC, rather than paying large “special” assessments directly out of earnings.

Theoretically, banks themselves would pay back the FDIC’s bonds, but in smaller amounts that FDIC assesses over time. In the meantime, because their capital levels aren’t reduced, banks can continue to lend. More lending will spur “recovery,” and banks will eventually earn their way out of trouble. Or so their argument goes.

The idea that more lending is going to help us recover from a credit binge is itself laughable. But the bigger issue is the size of losses that are festering on bank balance sheets. The losses are so large that normal assessments are unlikely to be able to cover them.

But banks don’t want to admit to their losses. They’d prefer to extend and pretend in order to avoid the kind of wholesale restructuring that is necessary to repair the financial system’s balance sheet.

And in any case this plan most likely wouldn’t spur lending into the real economy. It may actually cause lending to contract.

Right now banks have hundreds of billions of excess reserves parked at the Fed earning an interest rate of just 0.25 percent. Presumably FDIC-backed bonds would pay better.

So besides avoiding the pain of special assessments, banks would have a new, more profitable place to park reserves.

Sheila Bair should ignore such delaying tactics floated by banks and order them to pay more special assessments into the Deposit Insurance Fund.

To emerge from the financial crisis in better shape, we need to shrink the financial sector. An important way to do that is to reduce the return on equity available to bank shareholders. Charging banks appropriate fees for deposit insurance can help achieve that.

Comments

[fed_alchemy:]

It appears that zhombie banks get more welfare and the small capitalized bank gets disproportionate fees.

Sep 22 03:18 PM

[William M. ...:]

You said, "FDIC insurance is the best marketing tool in American finance, and for too long banks paid next to nothing for it."

Amend brother Winkler.

When you look into the facts you find the banks paid next to nothing for 10 years thanks to lobbyist and Bank Economist who rationalized there was never a need for more than 1.5 cents to back up every dollar while we eliminated Glass-Steagall Act and leverage up after the last financial 90's crisis.

Sep 22 05:40 PM

[SugarDaddy:]

The FDIC should hand their fee structure based on the quality of a given banks balance sheet, loan portfolio, delinquencies, and other important criteria. Just as an individuals who gets speeding tickets or have constant homeowners claims receive higher premiums or are just dropped.
This will provide incentive for banks to do business the "Right" way or pay the Piper.

It's just this easy, but no, our Gov't leaders are just too stupid and corrupt.

Sep 22 05:58 PM

[58robbo:]

government should move toward phasing out deposit guarantees! as a country we have to look at how we define risk. i believe that every single decision we make in life carries a certain level of risk and there are no guarantees. when we deposit our money with a banking institution in exchange for interest we should understand that our money is invested for profit and that those invesments carry a risk. the level of risk should be compensated with higher interest payments fro higher risk and lower interest for lower risk. for the truly risk averse, their money should be stored in safe deposit like accounts and they ought to pay accordingly for the service. another thing we should understand is that once we commit our money, it's commited until someone else buys your position or the loan is paid back.

banks which operate with fractional reserves would tend to be greater risk for greater reward. unfortunately we cannot have our cake and eat for lack of a better term. reward entails risk

Sep 22 06:14 PM

[Robespierre:]

I'm all for that as long as we stop bankers and the regulators from hiding what's on the banks' balance sheets. It is impossible to asses risk if banks lie under the regulatory agencies consent. Also, while we are at it criminal charges should be the norm for any CEO that has material information and refuses to disclose it.


On Sep 22 06:14 PM 58robbo wrote:

> government should move toward phasing out deposit guarantees! as
> a country we have to look at how we define risk. i believe that
> every single decision we make in life carries a certain level of
> risk and there are no guarantees. when we deposit our money with
> a banking institution in exchange for interest we should understand
> that our money is invested for profit and that those invesments carry
> a risk. the level of risk should be compensated with higher interest
> payments fro higher risk and lower interest for lower risk. for
> the truly risk averse, their money should be stored in safe deposit
> like accounts and they ought to pay accordingly for the service.
> another thing we should understand is that once we commit our money,
> it's commited until someone else buys your position or the loan is
> paid back.
>
> banks which operate with fractional reserves would tend to be greater
> risk for greater reward. unfortunately we cannot have our cake and
> eat for lack of a better term. reward entails risk

Sep 22 09:33 PM

[hoover:]

I would just opine that since the public put up hundreds of billions of dollars for banks to reward them for their gross incompetence over the past twenty years, that the banks should now show their gratitude by screwing the public even more. Charge the public a percentage per month of their savings balances to pay for the FDIC insurance to cover their own accounts. Why not? Lobbyists run the government, so why should anyone care about voter (or bank customer) opinions?

Sep 22 10:38 PM

[LKofEnglish:]

Wait, I thought we hadn't had a bank failure yet. What do you mean the FDIC is out of money?

Sep 23 09:00 AM

[TeresaE:]

They do do this. The fee charged varies based on the "strength" of the individual bank.

The funny part is that the FDIC penalized a bank in Boston that has exactly ZERO bad loans on their books. Apparently being good stewards for shareholders and not buying into the liar loan hype is reason to be penalized by the government.

Yet one more time our government rewards failure and punishes success.


On Sep 22 05:58 PM SugarDaddy wrote:

> The FDIC should hand their fee structure based on the quality of
> a given banks balance sheet, loan portfolio, delinquencies, and other
> important criteria. Just as an individuals who gets speeding tickets
> or have constant homeowners claims receive higher premiums or are
> just dropped.
> This will provide incentive for banks to do business the "Right"
> way or pay the Piper.
>
> It's just this easy, but no, our Gov't leaders are just too stupid
> and corrupt.

Sep 23 11:31 AM

[TeresaE:]

Comerica is already doing this. So far this year our account has "earned" about $1.22, but the FDIC "insurance fee" has cost us over $8.

Negative interest, what a great plan for long term success in our country.


On Sep 22 10:38 PM hoover wrote:

> I would just opine that since the public put up hundreds of billions
> of dollars for banks to reward them for their gross incompetence
> over the past twenty years, that the banks should now show their
> gratitude by screwing the public even more. Charge the public a percentage
> per month of their savings balances to pay for the FDIC insurance
> to cover their own accounts. Why not? Lobbyists run the government,
> so why should anyone care about voter (or bank customer) opinions?

Sep 23 11:32 AM

[TeresaE:]

All their grand plans will amount to the same thing; destroying smaller banks to gift to the "too big to fail."

Crain's Detroit Business did a great piece on the real dollar effects of the FDIC increasing fees on banks this year. Results show that it won't be long and these banks will buckle so that BoA can swoop in and buy their assets for pennies on the dollar.

What a great plan, so wonder what we are going to do once the transfer of wealth, from all to 3 or 4 banks, completes?

Once we bankrupt the ENTIRE system, then just who is going to save these POS banks, and everyone of us.

Sep 23 11:36 AM

[Mark Bern:]

Teresa - You are absolutely correct in you assumptions that the "Too Big to Fail Banks" are using the current crisis to gather good assets from failed smaller banks at bargain prices, all with the blessing of our leaders in Congress. I suspect the plan (or at least the outcome that has been "sold" to our leaders) is for the big banks to "buy" their way to solvency using Federal funds from those reserve accounts sitting at the Fed.

Sep 23 12:10 PM

[The Hammer:]

Agreed so sent a message to the [e-mail]

The tax payers are getting pick pocketed time after time.

Sep 23 12:28 PM

[TeresaE:]

My grandpa taught me a very important life truth, when you want to see the motivations behind anything with government, follow the dollar.

All dollars, from Cash for Clunkers to the First Time Homeowners Credit to the "Help for Foreclosures" don't truly benefit the taxpayer (or citizen) they are gifts to banks.

Plain to see if you follow the dollars.


On Sep 23 12:10 PM Mark Bern wrote:

> Teresa - You are absolutely correct in you assumptions that the "Too
> Big to Fail Banks" are using the current crisis to gather good assets
> from failed smaller banks at bargain prices, all with the blessing
> of our leaders in Congress. I suspect the plan (or at least the outcome
> that has been "sold" to our leaders) is for the big banks to "buy"
> their way to solvency using Federal funds from those reserve accounts
> sitting at the Fed.

Sep 23 03:07 PM

[a fat panda:]

This is great. It is like me going to the doctor, and telling the doctor that his fee is too high. Instead of paying for the doctor visit, I will make them a loan instead to enable the doctor to continue to see patients. Somehow I don't think that the doctor will take that deal.

Sep 24 05:43 AM