FDIC: Tap Treasury to Cover Troubled Banks

The Federal Deposit Insurance Corporation (FDIC) may need to call upon the United States Treasury to provide liquidity in the face of expected bank losses. The FDIC added 27 new banks to its “troubled” list; bring the total for this half-year to 117, according to Financial Times.

The 117 listed banks hold a total of $78 billion in assets (up from just $28 billion in the first quarter). The FDIC guarantees the first $100,000 in individual deposits, so the vast majority of bank patrons nationwide are eligible for repayment. Unfortunately, the FDIC does not – nor would it be possible to – hold reserves equivalent to the entire nation’s banking deposits.

With only $45.2 billion in reserves at the end of the second quarter (down from $52.8 billion in the first) the FDIC may need Treasury funds to cover its insured deposits. The FDIC was incorporated after the “bank runs” of the Depression as a means of guaranteeing customers’ deposits in the case of bank closings. The system is perfectly suited to handle a few closings, and is in place to cover the majority of deposits from recent bank collapses. However, if the economy continues to sputter as it has recently the FDIC will find it increasingly expensive to replenish lost deposits.

Having already lost over $7 billion from its reserves in the last few months, the FDIC may need an infusion from the Treasury to cover its losses and maintain operations. As a for-profit corporation, the FDIC charges its member banks – 8,451 members with roughly $13.3 trillion in assets (see: quarterly report) – a fee to insure their deposits. From the fees collected it then makes the necessary repayments to customers of closed banks and keeps the rest for its own purposes. The FDIC’s current financial situation seems ripe for continued net-losses. If the FDIC were to hemorrhage cash reserves at rate of $7 billion per quarter as bank closing accelerated it would run out of reserves in just over one year.

If the FDIC does indeed call upon the Treasury Department to extend it cash on loan to cover more failed banks, it would be repaying the taxpayers with borrowed money, which they would in turn have to eventually pay for. Chairman Shelia Bair has stated that the funds would be repaid after the crisis, but in the spirit of deficit spending it is unlikely that any government agency could be counted on to balance its budget. Furthermore, as the agency itself expects the banking crisis to worsen in the foreseeable future, the possibility of repaying the Treasury after achieving stability may not be possible.

Our banking system is in shambles and its regulatory agencies may be unable to cope with the dilemma, but the prospect of using borrowed money (which will eventually have to be repaid with interest) to reimburse tax-payers is a foolish prospect.

Source Financial Times:

Click Here For Solutions To America's Economic Problems:

Click here to contact your Representative in Congress.

Spread this message with Digg, Del.icio.us, Reddit, or Stumbleupon, and subscribe to the RSS Feed to track articles