FDIC May Seek Bailout for Failed Banks

by Dollars and Sense

Banks large and small continue to drop like flies. The Federal Deposit Insurance Corp (FDIC) was set up in the wake of the Great Depression to guarantee depositors' funds when a bank fails. The FDIC is funded by insurance payments and fees made by banks. The wave of bank failures that includes megabanks Indymac and Washington Mutual, has placed the greatest stress the FDIC's funding ability since the S&L crisis of the Reagan/Bush era.

Despite a recent hike in fees that banks pay to the fund, the latest reports indicate that the FDIC is planning on borrowing the money from banks themselves. Suddenly, instead of paying for their insurance, the banks will be earning interest.

From the wires:

WASHINGTON - Regulators may borrow billions from big banks to shore up the dwindling fund that insures regular deposit accounts.

The loans would go to the fund maintained by the Federal Deposit Insurance Corp. that insure depositors when banks fail, said one industry and one government official familiar with the FDIC board's thinking, who requested anonymity because the plans are still evolving.

Regulators also are considering levying a special emergency fee on all banks, charging regular fees early or tapping a $100 billion credit line with the U.S. Treasury, the officials said.

FDIC spokesman Andrew Gray said that while borrowing from the banks "is an option, it's not being given serious consideration." The board meeting where the plans will be discussed is scheduled for next week.

The fund, which insures deposit accounts up to $250,000, is at its lowest point since 1992, at the height of the savings-and-loan crisis. Ongoing losses on commercial real estate and other loans continue to cause multiple bank failures each week.

FDIC Chairman Sheila Bair wants to avoid tapping the Treasury credit line, and Treasury officials insist that the strongest big banks have enough extra capital to operate, the officials said. Comptroller of the Currency John Dugan, who is a voting member of the FDIC board, has said he doesn't want to levy another fee on banks while the industry is still recovering.

The loans would give big, healthy banks a safe harbor for their money and would limit their risk-taking, said Daniel Alpert, managing director of the investment bank Westwood Capital LLC in New York.

It also would allow the industry's strongest players - which still rely on FDIC loan guarantees and other emergency subsidies - to help weaker banks avoid paying another fee, he said.

"Lots of banks are going to require more capital, and (Bair is) trying to rob from the rich and give to the poor," said Alpert, who supports the plan as a creative way to avoid another bailout.

Bankers and lobbyists strongly support the plan to have some big banks lend money to the fund, since it would help still-struggling institutions avoid another fee.

Rest of story here.

Labels: bad bank, bank closures, bank failures, bank fees, FDIC, FDIC fund

 

Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!).
9/22/2009 11:19:00 AM