Remember that 60 Minutes piece on bank failures I linked to earlier this week and how optimistic the Chairwoman of the FDIC sounded ?
“We’ve been around for 75 years and nobody’s ever lost a penny of insured deposits,” FDIC head Sheila Bair told Pelley. “…which is why you need to make sure you are below the insured deposit limits.”
Bair told Pelley the insured deposit limit is $250,000 right now.
“When the FDIC comes in and makes depositors whole at a bank that has failed, is that tax money?” Pelley asked.
“No. it is money from our reserves which, and we are funded by insurance premiums that are assessed on banks. So, no it’s not taxpayer money,” Bair explained.
Well, not so fast:
WASHINGTON – The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.
The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.
Now with 25 banks having failed last year, 17 so far this year, and many more expected in the coming months, the FDIC has proposed large new premiums for banks at the very time when many can least afford to pay. The agency collected $3 billion in the fees last year and has proposed collecting up to $27 billion this year, prompting an outcry from some banks that say it will force them to raise consumer fees and curtail lending.
To possibly reduce the fee increase, the FDIC has asked Congress for the temporary authority to borrow as much as $500 billion from the US Treasury – up from the current $30 billion limit – in case the number of bank failures increases even more dramatically. If Congress approves the measure, to borrow more than $100 billion, the FDIC would still need permission from the Federal Reserve, the Treasury Department, and the White House.
As of Dec. 31, the FDIC had $18.9 billion in its insurance fund – down from $52.4 billion a year earlier – in addition to $22 billion that it has set aside for pending bank failures. The agency has projected it will need $65 billion to take over failed banks through 2013.
(…)
Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of concern.” As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.
“That is five years of very healthy good times in banking that could have been used to build up the reserve,” Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. “That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times.”
Hurley agreed with Bair’s analysis of the FDIC’s dilemma. “Typically you would build up a reserve during the halcyon days to protect yourselves during a recession,” he said, calling the decision to stop collecting most premiums “a political one” that was pushed by banks and not based on strict accounting principles.
But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” There were relatively few bank failures and no projection of the current economic collapse, he said.
“Obviously hindsight is 20-20,” Chessen said.
Obviously.
H/T: Balloon Juice
March 11th, 2009 at 6:14 pm
the reason why it didnt colect any premiums durring the late 90’s was because they overcharged for the recapitalization of the fund durring and after the S&L crisis of the late 80’s and early 90’s. So the fund as a percent of insured deposits was well about the level demanded by law. Now maybe you could argue this level wasnt high enough and law should have done otherwise. But it wasnt due to an arbitrary or odd prctice to not charge premiums durring the late 90’s.
Yes it is true that the FDIC has a line of credit with the treasury, but it has never been used. So as of now, it isnt tax payers money (unless you accept the fdic premiums as a corprate tax essentially). The reason why the fdic is now asking for an increase in the line of credit is not because they expect to use it, but rather its because or some retarded leveraging technicality that restricts the size of the assets of institutions that they can place under receivership. By theoretically having the line of credit bigger, even if they don;t use it, they are able to absorb and then sell off larger amounts of failed bank assets. This was sone so that the insurance premium increase wouldnt have to be so large its the short run while banks are struggling to begin with. Its just an accounting technicality to comply with a stupid rule.
March 11th, 2009 at 6:15 pm
but this level of detail doesnt make the press
March 11th, 2009 at 6:16 pm
or you could argue we don;t even need an fdic… but thats another story
March 11th, 2009 at 9:53 pm
FDIC head Bair is a liberal disaster. She has been a vocal advocate of forcing banks to rewrite loans to avoid foreclosures.
But if you think the FDIC is a problem, and it is, just wait until FHA blows up. Congress has forced FHA to insure loans with virtually no money down and for people with bad credit. In essence, FHA is now the subprime lender of choice, backed by the American taxpayer. In the last year it has gone from backing 2% of mortgages to 30%, a scary figure. Something like 50% of those are defaulting without ever even making one payment. The bailout of FHA could be another 1 trillion dollar debacle.
March 11th, 2009 at 10:58 pm
and FHA loans only require 3% down payment for first time home buyers and a FICO score of 580… basically they are government backed subprime loans