Posted by: Theo Francis on August 27
The headlines look scary: The fund insuring U.S. bank deposits has shrunk to $10.4 billion from $17 billion in December and $52 billion in late 2007. The number of banks on the government’s problem list jumped to 416 from 305 last year. Forty-five banks have failed so far this year, more than in the last six years combined.
The banking industry is hurting, make no mistake. But before you stash your savings in your mattress, take a closer look at the numbers out today from the Federal Deposit Insurance Corp.
They’re not rosy, but they might not be quite as scary as they seem, even if they signal more pain for the banks themselves.
Let's start with that $10.4 billion, a low-water mark not seen in the FDIC's deposit insurance fund since about 1993.
You get it by taking the FDIC's assets -- $21.6 billion in cash or equivalents and another $43.2 billion in other assets, largely accumulated by taking over failed banks -- and subtracting $22.4 billion in liabilities and another $32 billion for a "contingent loss reserve for expected failures." That leaves $10.4 billion left over.
But here's the good news: That contingent loss reserve is what the FDIC expects to shell out (over time) for bank failures going forward, taking into account worsening conditions. In other words, even after projecting the pain from the financial crisis, the FDIC still expects the deposit-insurance fund to be $10.4 billion in the black.
Granted, the FDIC's projections could be wrong, and $10.4 billion doesn't look like much measured against the more than $4.8 trillion in deposits guaranteed by the agency. But even if the FDIC were off by 33%, and bank failures ultimately cost it $48 billion instead of $36 billion, the deposit fund would be only $1.6 billion in the hole.
That deficit wouldn't materialize all at once, but even if it did, the FDIC could meet close the deficit by drawing on a $100 billion line of credit from the Treasury for just this purpose -- and could even tap into another $400 billion with the approval of the Treasury and Federal Reserve.
The loan would come from the government, but not out of taxpayers pockets. Instead, the FDIC would assess fees on surviving banks. Granted, those fees would largely be passed on to you and me, but only indirectly, in the form of lower interest on our deposits. It's probably still more than you'll get from your mattress.
From a bank's perspective, and from a bank investor's, the picture is a little bleaker, of course. Generally the FDIC tries to keep its fund at 1.25% of insured deposits, and while it has proposed jiggering the formula to put more of the burden on bigger banks, getting back to that level from less than 0.25% will take some cash. Once again, that cash comes from surviving banks -- even if the FDIC doesn't blow through its remaining cushion.
To get back to normal, analysts suggest the FDIC's assessment could rise to 30 or 40 basis points (0.3% to 0.4%) of deposits. It doesn't sound like much, but it's high historically. For many banks it could amount to maybe 10% of revenues from deposits, or a quarter to a third of their margins. They can only cut the interest rates they pay us so much to absorb that (you're lucky to get close to 1.5% on savings these days), meaning investors could take a hit.
Then again, the surviving banks would also divvy up our banking business going forward, so it wouldn't be a complete loss.
Proofread your article. 4.8 billion guaranteed deposits, or 4.8 trilion? 48 instead of 36 is a difference of 33%,not 50%.
"Granted, tose fees..."
Granted, the editors of this article should have put this article through a basic spell check program, but that probably would have been asking for too much from *those* guys.
Um, the FDIC insures $4 TRILLION in deposits. Kindof a big difference.
this comment is only accurate as of june 30th:
"You get it by taking the FDIC's assets -- $21.6 billion in cash or equivalents and another $43.2 billion in other assets, largely accumulated by taking over failed banks -- and subtracting $22.4 billion in liabilities and another $32 billion for a "contingent loss reserve for expected failures."
the contingent loss reserve is actually only about $21 billion. see there have been numerous and large failures during july and august that were charged off to the reserve after they closed the books. also, the fdic knew this at the time of the press release. in reality, the cushion is 25% smaller that they let on. i suspect if this was a publicly traded firm making those comments at a press conference fully aware of subsequent events, the sec would come a calling.
How ironic the FDIC is under funded, when it's bringing down good banks because they are underfunded. And no one has stopped to ask the banks FDIC has to put up for private auction why they were underfunded.
So many times we see good banks with no sub prime exposure, yet FDIC has to give them notice they are under capitalized.
I contend that IF a bank is undercapitalized by majority share through 'fair' non sub prime real estate loans ? and are down merely because real estate is temporarily down ? Then mark to market is innappropriate in times of crisis like this.
We need criminal investigation into why Countywide would all of a sudden in 2002 just say "hey, come on in, we don't care if you don't have any equity to put into the mortgage, we don't even care if you have a job, we just want to rack up as many mortgages as possible, we've got Wall Street on standby with Moody's all ready to triple A them, we've got Fox News running people scared and in between the terror spook ? They can see our Countrywide ads, AND we've got the alleged President of the US promoting everyone should just go buy a home, now, forget the down payment or equity".
Once we can show the housing market was hosed with intent ? Then banks, the GOOD banks being brought down MERELY because they had mortgage products (non sub prime at that) on their books ? can get a free pass until the central banks 0% interest rates can bring housing back to life.
Until this - we're breaking the China in the house swatting at flies.
FDIC needs to step up to plate here and say - ok banks - you're under capitalized, IF you can prove to us it's not through sub prime ? then we'll look the other way, and besides, we've got you covered, 250k per deposit account worst case scenario. Unless of course, FDIC just did the 250k from 100k ONLY to instill confidence and they never had means or intent to actually pay out.
I suppose at the least AIG didn't insure the banks OR the FDIC. Seems AIG just insured the investment banks that took zero equity products, passed them on, and when everyone opened their lunch bags to see them empty ? AIG insured Goldman, and US Citizens HARD EARNED tax money insured AIG.
AIG was the FDIC for the investment banks. Different subject really, but can't help mentioning that observation.
This article loses credibility with me when the author did not even bother to run a computer spell check on it, much less had it proof read by a third party. 'tose' ... really? What about this, "$10.4 billion doesn't look like much measured against the more than $4.8 billion in deposits guaranteed by the agency." Is that supposed to be 4.8 trillion? Sigh. How many ad clicks do I need to get BusinessWeek to hire a proof and copy editor? Sorry Theo for making you out to be the scapegoat. This has become an endemic problem throughout the print media unfortunately.
While AIG ran ads prior to it's likely internally known collapse ?
"My parents went with AIG " ?
While AIG insured the investment banks that laundered Countrywide's zero equity mortgage products (really, who in their right mind would underwrite a mortgage with zero equity, really - you HAVE to ask - was it criminal intent or complete incompetence missed at every stop along the way it could have been picked up) ?
The FDIC insures the US citizens deposit accounts.
Now, I've joked in the past - instead of "My parents went with AIG" of making t-shirts to sell on ebay that say "My parents REALLY went with AIG" or "My Nation state went with AIG" ?
I now have to ask what goes with the FDIC.
I guess we can say - "My bank went with the FDIC" as in WENT DOWN, cut up in private auction, best gems picked up for pennies on the dollar. Buyers ? often pristinely restored by the tax payers through TARP.
If we had abuse with Countrywide - and then we just dole out 350 billion to these very investment banks and their insurers ? (AIG) ? How can we expect any less abuse ? Not to mention, no strings attached on that money to which I observe Elizabeth Warren going "that can't be right".
I raise this question:
IF when AIG failed ? the US citizens bailed out the corporate insurance unit that irresponsibily backed the investment banks ? and also ran a global derivatives casino on the side WITH insurance premium money ?
If the FDIC fails - who is going to bail the FDIC out ?
And won't it be bizarre when we say- ah HA - Citizens bail out the corporations, but when the FDIC fails ? or goes bust ? Well, that's just it - we're so strapped now, we're into the 20+ trillions all added up on bailout approaches, what's left for the good ole FDIC ?
I see change comin' alright !
Not sure exactly what - but FDIC can't bear the brunt of the fallout from the investment banks - we dun spent all the money on Goldman, and Goldman's AIG insurer - and left the FDIC to hang out to dry.
And now what ? All the FDIC can do right now is charge more premiums to the banks to beef up the money pool they have to dole out in the case of a bank failure - LIKELY caused BY the deflation of real estate, as I see with so many good banks that have gone bust.
HeyTheo........borrowing on theire line of credity at the Treasury is not a good thing and it DOES shown had bad of shape the FDIC is in. Where do you think the TSY is going to get the $100 billion????? under Turbo Timmy's chair??? And remember the assets they have taken back.......are you confident that the marks are correct......I'm not.
All -- Thanks for catching my errors; they should be fixed now. Much appreciated, and apologies.
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