FDIC Insurance Fund - It Doesn't Actually Exist 51 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 51 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.
Everyone needs to read the "Creature from Jekyll Island". Also watch the DVD "The Obama Deception" a documentary produced by Alex Jones at Infowars. This video has had more than 15 million hits on the internet and that's not the ones that are copied and handed out, which Alex allows you to do on all his videos, and sales of the original DVDs. This video explains who is exactly behind both parties, not just one, and how this has all been in the works for years. This just didn't happen overnight. This was all carefully crafted and engineered by design. There are government documents, books and dvds to back up this information. It's all out there or you can go to Alex Jones website at Infowars.com and listen to his daily 4 hour broadcasts and Sunday too or listen to his rebroadcasts 24 hours a day. His website is loaded with news articles that change daily including all those great new Bills they are trying to cram down our throats that the mainstream media does not do a good job covering or refuse to cover. His archives are phenomenal. Audio, video and written. He backs everything up. It is not his imagination. It is real! He is one of the few telling the truth about what is going on and he puts all the puzzle pieces together. Once you listen to him, you'll find yourself saying to yourself oh is that why and reading the newspaper or listening to the mainstream media in a whole new way. Our mainstream media is bought and paid for. It has been for decades. Yes, even your popular conservative radio talk show hosts are. Why do you think they get these big contracts? They have sold part of their souls to the devil. They only say so much to keep us listening but we really never get all the news or the whole picture. They are controlled. Alex has been offered high-paying radio spots too, but with that, comes control and he refuses to accommodate. Truth is too important to him. He is gaining a great deal of momentum and he has some really great and creditable guests on his show. He broadcasts on the internet, some am/fm stations, shortwave and satellite radio. Give him a couple of weeks and you will be glad you did. You won't want to listen to anymore mainstream news again.
America will never see the light of liberty again if you do not open yourself to seek and learn the truth. We cannot continue this bickering between the two parties. That's what they want us to do. They control the two parties. They want us to stay divideded. They don't want the American people to know the truth and stand together as one. If you don't get an understanding of the whole picture, WE ARE DOOMED!
If you do anything for yourself, your family and this Country, do one thing. Call, write or email your Senator(s) to support HR 1207 which would audit the Federal Reserve. This Bill has 247 cosponsors, including republicans and democrats, in the House and is sponsored by Ron Paul. This is a bipartian bill. I don't think there has ever been a Bill that has had so many cosponsors. The passage of this Bill would finally tell us where our hard-earned American dollars are going to. Don't let your Senators bully you and say this would put us in an economic crisis. A lot of them are protecting the Federal Reserve because of their self-interest. We already are in an economic crisis and either way we will have one. It will, however, be much worse as long as the Federal Reserve is in charge. Congress is supposed to handle our money not a private bank. President John F. Kennedy signed an Executive Order that still stands today in June, six months before his death, to bring our money back to the gold standard and get rid of the Federal Reserve. In November, sadly, he was assassinated. He was one of our last great Presidents. Please put pressure on your Senators NOW. They are stalling. Why? Don't we deserve to know where our money is? Why is the Senate protecting them? They should be protecting the American people. Tell everyone you know. We have to become a strong force on this Bill.
REMEMBER THIS IS YOUR MONEY AND YOU SHOULD KNOW WHAT IS BEING DONE WITH IT!
Well, the big derivatives monsters didn't pay while the small ones basically paid for the gov.
Now-needy FDIC collected little in premiums
With fund going strong, banks didn't pay for decade
www.boston.com/news/na...
On 2008 Sep 12 04:29 AM dlaw wrote:
> This is more laissez-faire silliness.
>
> 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.
On 2008 Sep 15 06:20 AM Confuser wrote:
> Anybody who have learned a bit more than accounting knows that all
> mega transactions don't involve physical movement of cash but are
> paper adjustments. Once it is in the treasury they do not and cannot
> separate them into each department physically. Only that they should
> make sure amount allocated to each department is not debited or credited
> the wrong way. So the allegation that FDIC fund does not exist is
> not right. Yes, our country has some shortcomings but that doesn't
> mean it is a banana republic.
There are solutions to a lot of the problems raised but, unfortunately they take time and the Congress you elected will be in a hurry so it probably won't be a very pretty solution but it can be changed in time.
You CAN be part of that change but not with the 'blow off' rhetoric so often seen here. Write your Congressperson. Be polite. Reference a bill number if possible and describe both your objection and offer a solution. Letters that are well framed do count whereas "blow off' diatribes don't.
Good luck!
Here are some preliminary numbers for the FDIC Q2 assessment:
Susquehanna Bancshares Inc. $6,200,000 (13.0 billion in assets)
Westamerica Bancorp. $2,300,000 (5.5 billion in assets)
Pacific Continental Corp. $500,000 (1.1 billion in assets)
Indiana Community Bancorp $475,000 (1.7 billion in assets)
> - and Republicans generally want it to do that a whole lot."
I don't and suspect that other conservatives don't either. That leaves the RINO's, those that are most like the Democrats.
But the writer didn't list the Democrats as wanting the government "to do that a whole lot" so they are clean and pure as snow. The trouble I see is that we shouldn't touch that pure Democratic snow, it's actually yellow.
Generals accept battle because they think they will cheaply win or are forced to.
Liberals can't win an honest debate? To quote Worf, "It will be glorious."
On 2008 Sep 12 04:29 AM dlaw wrote:
> This is more laissez-faire silliness.
>
> 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.
Let us suppose that total insured bank deposits are $1,600 billion. Technically, in the case of a run on the banks, the Fed could exercise emergency powers and print $1,600 billion in cash to give to the FDIC to pay off the bank depositors. The problem is that, emboldened at this massive bailout, the depositors would promptly redeposit the new $1,600 billion into the banks, increasing the total bank reserves by $1,600 billion, thus permitting an immediate expansion of the money supply by the banks by tenfold, increasing the total stock of bank money by $16 trillion. Runaway inflation and total destruction of the currency would quickly follow.' - Murray Rothbard
FDIC is not building reserves if the money is simply placed in the budget as the Vernon Hill in the article states "The insurance premiums aren't really premiums at all, therefore. They're a tax by another name".
On 2008 Sep 13 05:56 PM Zachary Pruckowski wrote:
> So the FDIC is an insurance company that invests entirely in T-Bills?
> I don't see the problem. Actually, this is smarter than diversification.
> As I see it, most other investments (stocks and mutual funds, primarily)
> suffer in at least the short term with bank failures, making them
> a bad FDIC investment (you lose money in your investments right when
> you need to use it to cover your insurance obligations).
>
> Notably, the FDIC is itself insured by the federal government.<br/>
>
> 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.
1. FDIC not maintaining an insurance fund but paying it into treasury which is used for other purposes. I really have nothing against that as I see it like an insurance company that is responsible to cover the payments to the insured. And insurance is definitely a hidden tax that the banks obviously lowers the interest it pays you. If it were a fund - then as it grows the politicians would fight for lowering the insurance premium and when time comes and the banks fail we would be in the same state we are now. Isn't that happening right now - a depleted fund with many bank accounts to insure?
2. How does the author propose we grow the FDIC fund other than "taxing" the banks. The insurance premium has to come from the ones being insured. The author seems to be blaming the current way of funding the FDIC without specifying any clear alternatives.
When are you people going to learn about the puppets in DC? same for other TOOLS like Paul Krugman, MSM, and the Dept. of Propaganda.
Ignorance is Bliss.... please wakeup
On 2008 Sep 12 04:29 AM dlaw wrote:
> This is more laissez-faire silliness.
>
> 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.
Econ 101 teaches that it is impossible to discharge a debt with another instrument of debt.
When this country prints more money, they are printing more debt. And any country that employs more people than they do in the manufacturing sector will remain very sick.
Rid the Fed, No more bailouts, return to a sound money system, stop foolish government spending may put this country on the right path. Get rid of your congressional representatives who don't feel this way...and replace them with sensible people who do...like Congressmen Ron Paul.