As of the end of the third quarter, the Deposit Insurance Fund, the fund that backs up the guarantee that deposits in bank are secure up to $250,000, has dropped into the red to the tune of $8.2 billion.
This is no surprise, as the numbers have been suggesting this for months, but the FDIC has also stated that the fund had run out of money, although it’s the first hard data released as to the actual numbers involved.
It’s impossible to tell at this time what this means going forward, as the 124 banks that have already failed in 2009 don’t even make up the bulk of the hundreds of other banks considered officially at risk, with many more than that at risk as well.
This is the first time since 1992 that the Deposit Insurance Fund has operated in the red, and that was in connection to the savings-and-loan crisis.
In a political move so the appearance of not having the public bail out the fund, the FDIC recently ordered banks to prepay their annual assessments for the next three years, which came close to $45 billion, in order to replenish the fund. If this wasn’t done, the FDIC would have had to tap the $500 billion credit line from the Treasury Department, something FDIC Chairman Sheila Bair strongly resists. It would, as I mentioned, also carry potential political consequences.
Even so, a number of industry watchers believe the FDIC will eventually have to tap into the credit line eventually, so this will probably just be something that buys them time.
One other aspect is the government has been attempting to manage the rate of banking failures and news related to them, as too much aggregate news at one time could cause panic, and end up with runs on the banks. With hundreds of banks believed to be ready to fall over the next year, that could still happen.
The FDIC have projected that bank failures over the next five years could cost the insurance fund up to $100 billion. The answer in order to protect the deposits of Americans is to either increase special assessments to the banks via prepayments, or to end up tapping into the huge emergency credit line at the Treasury. One carries risks to the banks who would have to use funds for those measures instead of growing revenue, or political risk that taxpayers will continue to be forced to bailout the industry.
Deposits at banks should be safe for Americans, as the fallout from failure in that regard would be unprecedented politically, and so that is at the top priority of the FDIC and its Deposit Insurance Fund. There’s no way they would allow failure unless the conditions end up being far graver than we know, and there simply isn’t the ability to pay out what is promised.
