FDIC Raised Fees on Banks to Prevent Fund Insolvency

by: Balance Sheet Future

After 16 failed banks to date in 2009, the FDIC raised fees and assessments on member banks to prevent insolvency later this year due to its forecast for more bank failures.

FDIC Chairman Sheila Bair Says Insurance Fund Could Be Insolvent This Year

“Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.

“A large number” of bank failures may occur through 2010 because of “rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

How many bank failures defines a "large number"? The 16 failures in the first two months of 2009 is tracking well above the total of 30 during all of 2008. A look back over the history of the FDIC shows the current rate of bank failures is not that large a number when compared to history.

Decade* Institutions
30's 312
40's 99
50's 28
60's 44
70's 79
80's 2,036
90's 925
00's 78
*Data from 1934 - 2009.
Source: FDIC

Bair recognizes the jump in bank failures to come and is adjusting fees accordingly. The FDIC fund lost $33.5 billion last year and stood at $18.9 billion at the end of 2008. Will the increase in fees on member banks cover the cost of the large number of bank failures to come or will government support/bailout be necessary?

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.”

I applaud Bair for not turning first to the taxpayers to build the fund. Banks must be held responsible for their actions. The FDIC performs the necessary role of removing bad banks from the system and selling the good assets to a strong bank. See more of my throughts on the government's response in Cleaning Out the System.

During yesterday's rally many financials did not participate: JPMorgan (NYSE:JPM) was down 8% and Wells Fargo (NYSE:WFC) was down 9% on news of a potential downgrade from Moody's. The Dow Jones Regional Bank Index (NYSEARCA:IAT) was down 3.9% while the overall financial sector (NYSEARCA:XLF) was down 1.3%. If yesterday's rally is to continue, the financials look to remain weak as the loan losses and bank failures increase.