FDIC Running Out of Cash

The FDIC is estimated it will need $70 billion to cover bank failures through 2013 — about 5X recent cash holdings of $13 billion. Through March 2009, the FDIC recorded over $19 billion in losses. The most recent failure is Texas Guaranty Bank, at a cost to the agency’s insurance fund of $3 billion dollars.

The FDIC is one of those rare regulatory agencies that operates, for the vast majority of the time, without taxpayer funding. Bank fees pay for the insurance of the Federal Deposit guarantees.

Given the enormous increase in bank failures — some estimates are for more than 300 this year — we will very likely see some taxpayer support of the deposit insurer.

This was all but inevitable:

“The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest. The government agency that guarantees depositors against the loss of their money in a bank failure may need its own lifeline.

The FDIC on Thursday will disclose how much is left in its insurance fund, and update the number of banks on its list of troubled institutions. That number shot up to 305 in the first quarter — the highest since 1994 and up from 252 late last year. FDIC Chairman Sheila Bair may also use the quarterly briefing to discuss how the agency plans to shore up its accounts.”

This was in no small part behind the FDIC decision to make it easier for private equity to acquire failed banks at distressed prices.  There are that many fewer large banks who are potential buyers. Hence, the new rules allow private equity buyers to maintain a failed bank’s reserves “at levels equal to 10 percent of its assets.” Prior rules set a higher requirement, and mandated new owners maintaining a bank’s minimum capital levels for three years.

The theory is that softening these requirements will attract the attention of more potential buyers, bringing in fresh capital to the FDIC.

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Previously:
How Over-Extended is FDIC Insurance ? (April 6th, 2009)
http://www.ritholtz.com/blog/2009/04/how-over-extended-is-fdic-insurance/

Source:
Hammered by bank failures, FDIC may need to draw cash from banks or government STEVENSON JACOBS
AP Business, August 26, 2009 | 9:48 p.m
http://www.latimes.com/business/nationworld/wire/sns-ap-us-fdic-shrinking-fund,0,1644675.story

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