FDIC Seeks to Attract Additional Buyers of Failed Banks

After 8 months into the year, the Federal Deposit Insurance Corporation has seen over 80 bank failures and has had engineer purchases for each of the failed banks. After last Friday’s failure of Colonial BankGroup, the largest bank failure this year, the FDIC is taking steps to attract more buyers of troubled financial institutions to prevent it’s insurance fund from being drained.

Federal regulatory bodies plan on making it easier for private equity firms to purchase failed banks and insolvent lenders in hopes of reducing the number of failed banks that the FDIC’s insurance fund has to support. The FDIC is also planning to attract additional buyers by agreeing to take some of the burden of the potential losses from the failed banks that are purchasing. Finally, it’s reworking one of its primary financing programs which will make it easier to purchase “toxic” assets of financial institutions that have failed.

For the FDIC, it’s imperative that their insurance fund remains liquid. The US banking system heavily depends on the assurance to bank customers that they will be able to get their money back, even if their bank fails. To date, the FDIC has had no trouble repaying all of the customers of failed banks, but their insurance fund has dropped from $52.8 billion in assets a year ago, down to just $13 billion at the beginning of April.

So far, there have been 80 bank failures in 2009, compared to just 25 in 2009. The FDIC was able to find buyers for 69 of the 80 failed institutions, but has faced significant hits to its reserve funds for banks where buyers could not be found. Since many of the banks that have failed have relatively large losses compared to their assets, the FDIC has had to dip into its insurance fund to repay many account holders and creditors.

It’s likely that the FDIC will see a number of additional bank failures in 2009, especially among banks that have a significant number of sub-prime mortgages and other real estate loans on their books that might not be paid on-time or in-full.

Officials at the FDIC are very intent on protecting the insurance fund and making sure that customers of failed banks have full access to their insured funds, to the point where they are considering options that would not have been discussed months ago. There is even a possibility of the FDIC getting an emergency loan from the Treasury department in the event that its insurance fund is tapped out.

FDIC officials have stated that no financial decisions have been made, but its five member board will be meeting next week to discuss the aforementioned proposals.