Arizona Star (Link) - Stevenson Jacobs - AP (August 27, 2009)
The government agency that guarantees you won't lose your money in a bank failure may need a lifeline of its own.
The Federal Deposit Insurance Corp. coffers have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could go 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 agency reveals today how much is left in its reserves. FDIC Chairman Sheila Bair may also use the quarterly briefing to say how the agency plans to shore up its accounts.
Small and midsize banks across the country have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don't lose a cent.
It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.
None of this means bank customers have anything to worry about. The FDIC is fully backed by the government, which means depositors' accounts are guaranteed up to $250,000 per account. And it still has billions in loss reserves apart from the insurance fund.
Bair today will also update the number of banks on the FDIC's 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.
Because of the surging bank failures, the FDIC's board voted Wednesday to make it easier for private investors to buy failed financial institutions.
Private equity funds have been criticized for taking too many risks and paying managers too much. But these days fewer healthy banks are willing to buy ailing banks, and the depth of the banking crisis appears to have softened the FDIC's resistance to private buyers.
Under the new rules, a buyer would need to maintain the failed bank's reserves at levels equal to 10 percent of its assets. An earlier proposal set the requirement at 15 percent.
The new policy also eases the rules on when private investors
must maintain minimum levels of capital that might be needed to bolster banks
they own.
But the FDIC sought to guard against private equity funds that might want to buy
and sell quickly at a profit: It required the investors to maintain a bank's
minimum capital levels for three years.
At least in theory, allowing private investors to buy failing banks would mean the FDIC could charge a higher price, shrinking the amount of losses the agency would have to cover.
Bair has not ruled out hiking premiums on banks for the second time this year or asking the Treasury for a short-term loan. She has said taking the longer-term step of drawing on the Treasury credit line is only for emergencies.
So far this year, 81 banks have failed, compared with just 25 last year � and only three in 2007. Hundreds more banks are expected to fall in coming years because of souring loans for commercial real estate. That threatens to deplete the FDIC's fund.
"I think the public should expect the fund to go negative at some point," said Gerard Cassidy, a banking analyst at RBC Capital Markets, which has predicted that up to 1,000 banks � or one in eight � could disappear within three years.
Last week's failure of Guaranty Bank in Texas, the second-largest this year, is expected to cost the FDIC $3 billion. The FDIC recorded more than $19 billion in losses through March.
The agency figures it will need $70 billion to cover bank failures through 2013, more than five times the $13 billion that was in the fund in March.