Tuesday, August 03, 2010

Seven More Banks

CBS News told us last week that the FDIC closed seven more banks the preceding Friday, bringing the total for this year to 103 bank failures. They were, of course, small banks; large banks are not allowed to fail because… Well, whatever.

Update: five more were closed this past Friday, bringing the total to 108.

By this time last year, regulators had closed 64 banks. The number of bank failures is expected to peak this year and be slightly higher than the 140 that fell in 2009. Twenty-five banks failed in 2008, the year the financial crisis struck with force, and only three succumbed in 2007.

The expectation that failures will be “slightly higher” this year than last seems just a bit optimistic to me, given that the number stands at 108 currently against 64 at the same time last year, and that there in an all-time high of 775 banks on the FDIC's "problem banks" list.

Sheila Bair, who heads the FDIC, has enjoyed a reputation for making efforts to curb the excesses and corruption of Wall Street and standing by middle class interests, but my feelings about her are a little bit mixed. The financial dealings of the FDIC are just a little more opaque than I would like for them to be, although I’ll admit she has to manage with what she has been given by Congress and the recession.

The FDIC is funded by fees that banks pay for membership, said membership allowing them to put the little sign on their counter assuring them that your funds are “insured by the FDIC for up to $250,000.” That fee is, of course, passed on to the bank’s customers, so it is actually paid by the consumers who are benefiting from the insurance. I can’t say that I find that altogether objectionable.

With all of these bank failures recently the FDIC is, unsurprisingly, broke.

The growing bank failures have sapped billions of dollars out of the deposit insurance fund. It fell into the red last year, and its deficit stood at $20.7 billion as of March 31.

The picture is even worse than it looks, though.

The agency mandated last year that banks prepay about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

That was Sheila Bair’s doing. They were out of money, so she told the banks to prepay the FDIC’s income for two years. One has to wonder to what degree that has contributed to additional bank failures, but that’s another topic.

Anyway, the FDIC has gone through that future income as well as its existing fund, so not only are they $20.7 in the red, but they have already spent the next two years worth of income in the process and will not have any more income for more than two years. For the next 29 months the FDIC will be paying out on bank failures with no income, at the end of which time they can be expected to be $80 billion in the hole.

Yikes, that’s a lot of money. Who is going to pick up the tab for that? I will give you three guesses, and the first two don’t count.

Possibly the U.S. Treasury is going to kick in the money to even that out, in which case the taxpayers pick up the tab. The other alternative is that the FDIC makes the banks pay that deficit off, in which case the banks will pass that cost on to customers. Customers are, of course, taxpayers.

You will pay it in the form of taxes or as bank fees, but you will pay it.

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