The FDIC's Deposit Insurance Fund Reserve Ratio Slumps

The Federal Deposit Insurance Corporation (FDIC) plays a key role in the stability of the banking system and in the protection of depositors funds. FDIC ensures banking system stability by giving guarantee to depositors that they will get their money back if a bank fails. Had this system not been there in place, a panic lead run on the bank would have resulted in the collapse of the entire banking system which is largely based on trust.

However, the current financial crisis has resulted in a sharp decline in the FDIC's deposit insurance reserve ratio. This effectively means that the FDIC has too little funds to protect the depositors in case of failure of banks. The chart below gives the deposit insurance reserve ratio from 2006 till June 2009 for the FDIC.

Deposit Insurance Fund Reserve Ratio

The deposit insurance fund reserve ratio has gone down from 1.23% in March 2006 to 0.22% as on June 2009. The FDIC has total insured deposits of $4.8 trillion as on June 2009. Thus, a 0.22% ratio would mean that the FDIC has funds of just over $10 billion in hand for the $4.8 trillion of insured deposits. That's very close to a bankruptcy of the FDIC.

Such a low ratio might still not have been a concern if the banking system would have been in good shape. But this is not the case currently. The FDIC also publishes a list of number of FDIC insured problem institutions. These are banks which are in danger of being wiped out. The data for 30 June 2009 shows that there are 416 institutions which could be potential failures in the near future. What is more worrying is that the number has gone up from 305 problem institutions in March 2009.

I must add here that the FDIC has been slow in closing down banks because of the weak economic scenario and because of their own funding requirements. Another reason for making the process of bank closure a slow one is to prevent any panic. If that happens, then the entire banking system would be in trouble.

However, the process of bank closures might accelerate in the future and it is to some extent evident from the rising problem institutions identified by the FDIC.

FDIC Insured Problem Institutions

It will be interesting to see when this rising trend of problem institutions halts or declines. These 416 problem institutions have assets worth $299.8 Billion. This again is a gigantic figure as compared to the funds the FDIC has at present.

In September 2009, the FDIC said that bank failures would cost $100 billion through 2013. This number was up from the earlier estimate of $70 billion. In my opinion, this figure is very likely to go up further in the near term. On Friday, 23rd October, the FDIC announced the 100th bank failure for the year.

Assets of FDIC Insured Problem Institutions

So, the FDIC has a big task in hand and in all probability it will run out of funds. Since the depositors have to be insured in order to prevent a total fallout of the banking system, the Government must be ready with bailout funds for FDIC.

So where will the funds come from?

Federal Deposit Insurance Corp. Chairman Sheila Bair had the answer to this. The text below in italics is from Bloomberg: (March 2009)

No Taxpayer Funds

"Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department and legislation pending in Congress would boost the amount to $100 billion. "

“Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”

In order to replenish the funds, the FDIC wants member banks to pay in advance $45 billion in premiums that would have been due over the next three years. However, the ability of member banks to pay this amount in advance might be an issue.

The FDIC also has the option to tap the credit line from the Treasury of up to a half-trillion dollars to ensure that the depositors get back their funds and the agency is also not bankrupt.

It has to be noted here that the fund crisis for the FDIC is not a new one or for the first time. The FDIC had a negative fund balance in 1991, during the savings and loan crisis, when the agency chose to borrow from Treasury. The same institution will come to its rescue this time as well.

My Opinion

Whatever resources are used now, the ultimate responsibility of covering all this cost will fall in the hands of the taxpayer through higher taxes or through massive inflation (another form of tax).

A better solution would have been to confiscate all the profits of the big banks which is being made by trading with the tax payers funds. These profits should have been used in order to give back the depositors their holdings in the failed bank.

However, if this was done then these institutions would lose the incentive to trade (as it benefits the masses) and then their names would also figure in the list of problem banks in the FDIC reports.

So the taxpayers have to bite the bullet as they have been knowingly and to a large extent unknowingly doing for a long time now.

Comments

[William M. ...:]

No question the funds are rock bottom. 100 banks have failed and we know more will fail. But Bair is spot on the money when she says. "Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.” The law that created FDIC insurance required it to be paid for as a cost of business for banks. After all not who would put money into a non-FDIC insured bank. I'd buy gold bars and bury them in my back yard before risking $100,000 in a non-insured bank account paying only 1.75% interest. Few people know that many banks paid NO FDIC
insurance premiums for 10 years!

She was one of the few people who said it was wrong they banks were allowed to pay no prems. back in 2003. If anything the big banks we bailed out who got a 10 year free ride due to their powerful bank lobby should be required for 10 years of back-prems. they never paid too!

Oct 26 10:03 PM