FDIC Insurance Fund - It Doesn't Actually Exist 32 comments
Vernon Hill
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When FDIC head Shelia Bair says her agency might have to bolster the FDIC's insurance fund with Treasury borrowings to pay for the new spate of bank failures, a lot of us, this 40-year banking veteran included, assumed there's an actual FDIC fund in need of bolstering.
We were wrong. As a former FDIC chairman, Bill Isaac, points out here, the FDIC Insurance Fund is an accounting fiction. It takes in premiums from banks, then turns those premiums over to the Treasury, which adds the money to the government's general coffers for "spending . . . on missiles, school lunches, water projects, and the like."
The insurance premiums aren't really premiums at all, therefore. They're a tax by another name.
Actually, it's worse than that. The FDIC, persisting in the myth that its fund really is an insurance pool, now proposes to raise the "premiums" it charges banks to make up for the "fund's" coming shortfall. The financially weakest banks will be hit with the biggest tax hikes.
Which makes absolutely no sense. You don't need me to tell you the banking industry is on the ropes. The last thing it needs (or the economy needs, for that matter) is an expense hike that will inhibit banks' ability to rebuild capital, extend new loans, or both. If the FDIC wants to raise its bank tax once the industry has recovered, I suppose that's fine. But to raise taxes on the industry now is perhaps the dumbest thing the agency can possibly do. At the margin, the FDIC will be helping bring about more of the failures it says it wants to prevent.
But this is the government we're talking about, so logic goes out the window. First, the FDIC insists its mythical bank insurance fund exists, when it really doesn't. Then the agency does what it can to run the imaginary fund's finances straight into the ground. Your tax dollars (sorry, "premiums") at work. . . .
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This article has 32 comments:
The difference between the government as an insurer/credit enhancer and any such actor in the private sector is that the government can print money and issue debt at the risk-free rate whenever it wants - and Republicans generally want it to do that a whole lot.
So, just as the government does to pay for Republican "tax cuts" (aka - "increasing borrowing on our spending"), they will issue debt to back FDIC, since, of course, our entire system is based on debt.
Banking relies on deposit insurance. Diamond and Dybvig proved that long ago. If the spending-mad Republicans spent-and-borrowed away the FDIC's reserves the way they spent-and-borrowed away the Medicare and Social Security trust funds, the nation will do what it has done since the New Deal - issue debt and invest to add value.
Perhaps you don't understand the idea of "insurance". There are tons of insurance companies all over the world, some with exposures significantly greater than the FDIC, and they find useful ways to park their money.
The whole idea of compartmentalizing is to reduce risk. The idea of a separate corporation for the FDIC is to keep the risk managed in one place, so (theoretically) managers at the FDIC should have pulled the fire alarm a couple of years ago, saying that their cost of risk was starting to exceed their capital.
When you're simply paying a tax and getting a direct siphon into the US Treasury, all the advantages of the "insurance" structure are gone.
Notably, the FDIC is itself insured by the federal government.
I agree that now is not a great time to raise premiums on banks, but the banks have done risky things themselves. Noone can argue that a bank isn't more likely to fail in 2008-2009 than in 2005-2006. As the risk in insuring banks rises, the premiums need also rise.
Mr. Hill, I'm not questioning you at all, but is there a reference you can offer to support this? I'm just curious.
From the sounds of it, they turn bank premiums over to the Treasury in return for T-bonds/bills/notes, which are slightly less-liquid than the premiums in cash-under-the-mattres... form, but the bonds at least maintain some purchasing power. Plus--correct me if I'm wrong--the FDIC would choose to free up cash by liquidating their nearer-maturity Treasury portfolio at a premium, since the front-end of the curve's rates are down, right?
Echoing Zachary, what's the problem with raised premiums? Regulators could demand that banks hedge their loans against nonperformance with CDSs, but there's a premium on swaps because default probability is high. When the probability of bank collapse is high, premiums for insurance should be too... however, I think that it should be a case-by-case, subjective assessment. Capitalization, solency, and reserves are a case-by-case, bank-by-bank assessment, so why aren't insurance premiums wrought from the same analysis?
Moral hazard indeed.
A tax enacted at the same time as a deposit guarantee, with the intent that the tax should, in the long run, be approximately enough to pay for the deposit guarantee. In any given year, of course, the money coming in may be more or less than the money going out, just as with an ordinary insurance company. And, just as with an ordinary insurance company, the money must be invested somewhere, preferably someplace that (as Zachary points out) won't fail at just the time you need to make a lot of payouts.
The important differences with an ordinary insurance company are
(a) an ordinary insurance company would also have to earn a profit to pay dividends to its shareholders, which FDIC doesn't have,
(b) an ordinary insurance company's policies are set by its own interest, rather than by (Washington bureaucrats' estimates of) the national interest, and
(c) since FDIC doesn't have a precise bank balance, it is theoretically possible for it to make LOTS of payouts in an emergency, limited only by the total Federal treasury and Congress's willingness to spend it.
You can decide for yourself whether each of these three differences is a good idea :-)
If deposit insurance were done by the private sector, do you think they would be raising premiums right now? Darn right they would, and probably more than the Feds will (since they wouldn't be obligated by "national interest", only by covering their own bottom lines).
I HAVE DECIDED TO BECOME A WRITE-IN CANDIDATE.
>
> HERE IS MY PLATFORM:
>
> (1) [edited]
>
> (2) We will immediately go into a two year isolationist posture to straighten out the country's attitude. NO imports, no exports.
> We will use Wal-Mart's policy, 'If we ain't got it, you don't need it.'
>
> (3) When imports are allowed, there will be a 100% import tax on it.
>
> (4) [edited]
>
> (5) Social security will immediately return to its original state. If
> you didn't put nuttin in, you ain't gettin nuttin out. The president
nor any other politician will not be able to touch it.
>
> (6) Welfare - Checks will be handed out on Fridays at the end of the
> 40 hour school week and the successful completion of urinalysis and a passing
> grade.
>
> (7) Professional Athletes --Steroids - The FIRST time you check
> positive you're banned for life.
>
> ( Crime - We will adopt the Turkish method, the first time you
> steal, you lose your right hand. There is no more life sentences. If convicted,
> you will be put to death by the same method you chose for your victim; gun,
> knife, strangulation, etc.
>
> (9) One export will be allowed; Wheat, The world needs to eat. A
> bushel of wheat will be the exact price of a barrel of oil.
>
> (10) All foreign aid using American taxpayer money will immediately
> cease, and the saved money will pay off the national debt and ultimately lower
> taxes. When disasters occur around the world, we'll ask the American
> people if they want to donate to a disaster fund, and each citizen can make
> the decision whether it's a worthy cause.
>
> (11) The Pledge of Allegiance will be said every day at school and
> every day in Congress.
>
> (12) The National Anthem will be played at all appropriate ceremonies,
> sporting events, outings, etc.
>
> Sorry if I stepped on anyone's toes but a vote for me will get you
> better than what you have, and better than what you're gonna get.
[comment edited for ethnic disparagement- SA editors]
The FDIC insurance fund should clearly charge higher premiums when risk increases. This is fundamental to insurance, but clearly history shows that Vernon doesn't understand fundamentals. Risk-based pricing of insurance is necessary and needed. To suggest otherwise is nonsense. The real failure of the FDIC isn't that it is increasing fees now, only that it failed to assess them for years when times were good (something Vernon suggested was "good" policy back during the boom-time). FDIC needs to be reformed, true enough. But this article says nothing about what matters, or what makes sense.
The US imports 75% of it's consumption or more of all of these materials.
Then of course where are you going to get your engineers, doctors, etc.? More than 40% of all hard science, mathematics and engineering students in US graduate schools are immigrants.
Your platform is so moronic we might as well give the US back to the Indians.
> positive you're banned for life. "
thank you for illustrating the problem with our country's leaders: with so many domestic and global issues and concerns, somehow athletes using steroids is viewed as a high priority.
Uncle Sam is a crook, and reading some of the comments on this thread I now believe that others are completely clueless.
Until there is transparency this place IS (according to another poster) a banana republic -- all fictitious smoke and mirrors based on leveraged vapor.
Plenty more to fail all over the world, folks.
Don't loan people any more money than you're willing to lose. And that includes loans to banks.
The FDIC owns treasury bonds. The FDIC is not the treasury, so no that isn't make-believe. Any more than a bank owning lots of treasuries is supposedly insolvant because its assets are "only" "IOUs". Every asset is an IOU.
The FDIC by law increases the contribution rate whenever its reserve drops below a statutory portion of insured assets, and falls when it exceeds a second, higher level. The changes are quite modest and take years to rebuild or run off any momentary level-change in the level of the reserve.
The FDIC hasn't cost the taxpayer a dime since it was founded. All losses ever paid out are less than the interest accumulated on the funds collected from the banks. It repaid its initial subscribed capital (from the Treasury and the Fed) decades ago in the 1950s. It was funded by a one-off loan for less than $150 million for 15 years in hard times. Everything since has been paid for by the *insurance premiums* it collects from banks, and interest on its holdings of treasuries. No, insurance premiums aren't taxation, and they generate huge positive returns for the banks that pay them, in the form of low rates on deposits rendered safe by that insurance.
Reckless ideologues are engaged in a systematic assault on American capitalism, and they should be ashamed of themselves.
As far as their being no fund, that's also true. The same accounting fiction exists with the Social Security system. The government has far less in assets than it has obligations. It is insolvent. Ultimately, it can only pay someone today by taxing someone else directly or indirectly by debasing the currency.
In the example of the United States, the original 13 British colonies became independent states after the American Revolution, each having a republican form of government. These independent states initially formed a loose confederation called the United States and then later formed the current United States by ratifying the current U.S. Constitution, creating a union of sovereign states with the union or federal government also being a republic. Any state joining the union later was also required to be a republic. The United States could be argued to be a supra-national republic on the grounds that the original states were independent countries and was formed of several nations, most notably the original 13 colonies/states, the Republic of Texas, and the Kingdom of Hawaii, all of which would be considered "nations" under a strict definition of the word.