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Could The FDIC Go Broke?

Posted by Larry Doyle on March 5, 2009 9:45 AM |

In very short order, the FDIC (Federal Deposit Insurance Corporation) has seen its reserves plummet from $50 billion to $18.9 billion at the end of 2008. At that pace and with the expectation of more bank failures, could this bedrock of our national banking system go broke? Well, FDIC’s Bair Says Insurance Fund Could Be Insolvent This Year.  Is Sheila Bair unnecessarily sounding warning signals? Am I running to the bank to withdraw my money? No and no.

Sheila Bair is proactively managing expectations for all concerned, those being politicians, regulators, bankers, and consumers. In fact, if she did not highlight the current state of the FDIC reserve fund and expectations for future declines, she would not be fulfilling her obligations.

The FDIC is funded by making assessments on all the banks throughout the country. With those assessments assuredly headed much higher, bank earnings will be dramatically impacted this year. In fact, analysts believe that many banks’ earnings will decline by anywhere from 50% to 100%!! The smaller community banks are enraged by the prospects of higher assessments given that many if not most of these banks managed their businesses with appropriate risk controls.

While taxpayers do not directly fund the FDIC, the fees incurred by member banks will be passed along to consumers in the form of increased charges on every transaction.  If you feel like you are getting “nickeled and dimed” to death it is due to these increased FDIC assessments.

In light of this situation, what is one to do? First and foremost, make sure you do not have any deposits over the FDIC insured deposit limit of $250k at any one institution. The FDIC website has a wealth of information including an online estimator to assist you in calculating your FDIC insurance coverage. Additionally, proactively manage your finances so you can minimize your banking needs. I continue to encourage people to shop around for your banking needs, as well as for insurance and all other financial needs. Credit unions remain a great alternative to many traditional banks.

LD

  • MPC

    LD-
    Does it really make sense for the FDIC to be raising the assessments charged to these same banks that are being shored up with taxpayer money as it is? This seems to me like giving with one hand and then taking away with the other, which would seemingly amount to a self-defeating exercise when the idea is to get banks lending, profitable, and stabilized. I believe one of the opinion pieces in the WSJ addressed this yesterday or today.

  • Larry Doyle

    MPC,

    It is all about confidence. If American consumers ever lost confidence that their savings were not protected then you would see a run on banks that would be devastating to our economy and country.

    I agree it is definitely a double edged sword but if consumers are not confident that their deposits/savings are insured, then the banks and everybody else will not have to worry about making loans or making anything else, because they’ll be out of biz.

  • fiscalliberal

    FDIC has to maintain the image of integrety of the small banks they insure. I contend the major way out of this mess is for small banks to lend to small business and home loans. Sheila is protecting that

    The alternative is for people to pull money out and put it in the mattress. Velocity of money goes low at that point. Let us remember that it is the financial community that created this mess by their insolvent practices.

    Sheila Bair is just bringting things back to reality. This is nothing new to her as she grew up in Kansas in tough times. She has a sense of reality along with integrety. Might be that she is the smartest of the bunch in the regulatory structure.

    There is no free lunch

  • fiscalliberal

    Interesting story on this link regarding a regulator who let Indymac cook its books to cover insolvency.

    http://abcnews.go.com/Blotter/Economy/story?id=7009596&page=1

    If stuff like this was prevalent, Sheila is going to have a lot of work to do.

  • Great link….and is this individual being investigated to determine if their was some sort of remuneration or compensation paid to him? Not to cast aspersions on all government and municipal employees but given their pay scale they are often easy marks for payoffs in order to curry favor and influence. This “pay to play” is rife in municipal finance. I wonder if this was a form of that.

    …now we the taxpayers pick up the tab…

  • lizzy

    One of my main concerns through this debacle has been that the FDIC would not be able to cover all losses from insolvent banks. I don’t know if I should be more alarmed or soothed by these revelations.

  • Larry Doyle

    Lizzy,

    I understand. All I can say is that , in my opinion, if the government did not stand behind the FDIC after having put trillions into the banking system that action would be cause for massive civil unrest.

    I am not one to unnecessarily promote anxiety but it is important that we are all aware of the state of the FDIC.

  • lizzy

    Thanks for the honest assessment of the situation.

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