ECON Concern Mounts About FDIC Deposit Fund

Concern Mounts About FDIC Deposit Fund
7/18/2008 8:19 PM ET
The FDIC is looking for ways to shore up its depleted deposit fund, including charging higher premiums on riskier brokered deposits, FDIC Chairman Sheila Bair said Friday.

However, that fund is "a myth," according to longtime banking consultant Bert Ely, and consumers may end up paying the price of what is expected to be a growing wave of bank failures.
NYU Economics Professor Nouriel Roubini predicts that Congress will have to intervene in order to bail out the deposit fund.

"They're going to run out of money, with certainty," he predicted. "Congress is going to have to recapitalize the FDIC, those $50 billion plus is not going to be enough, by no means."

Indeed, on Friday afternoon FDIC Chairman Sheila Bair said in an interview on C-SPAN television that banks holding brokered deposits may be charged higher premiums in order to bring back the reserve to an acceptable size.

"I think that is something we need to factor into our premiums and charge higher premiums to banks that fit that profile," she said in the interview, noting that the IndyMac failure was a big factor in the need for additional funds in the deposit insurance fund.

This means higher premiums for FDIC insured banks, analyst Ely noted, further complicating an already tenuous situation for the U.S. banking system. Banks will most likely pass the increased costs onto their customers, he said.

"Banks are going to pass it through to their customers through higher interest rates on loans, lower interest on deposit," Ely predicted.

The FDIC has around $53 billion set aside to back up bank deposits up to $100,000 per depositor, one of the ways the organization is designed to ensure confidence in the banking industry. However, according to Ely, that $53 billion is "not really available."

"The deposit insurance fund is as real as the social security trust fund," Ely said, noting that only a "small fraction" of the $53 billion is actually available and "any losses beyond that will be assessed on the banks."

The reserve, as of March 31, was valued at $52.843 billion, or 1.19 percent of the total insured deposits of $4.431 trillion. According to the Deposit Insurance Reform Act, the
FDIC must have at minimum 1.15 percent of all insured deposits in the fund, with a target rate of 1.25 percent.

The failure of IndyMac, which is estimated to cost the deposit fund at minimum $4 billion, brings the target below 1.15 percent, forcing the FDIC to adopt a restoration plan that will restore the Deposit fund to 1.15 percent within 5 years, according to the Reform Act.

"The $4 billion loss would drop the fund down to about 1.10 ratio," Ely explained. "The FDIC is going to be obligated of an increase in premiums to pay for that loss, so the only monies that are available $2.843 billion in the fund, of that $50.966 billion was not available."

Ely noted that any loss over $1.877 billion would have brought the ratio below 1.15 percent, meaning that losses are going to have to be assessed back to the banks.


http://www.rttnews.com/ArticleView.aspx?Id=658688&pageNum=2062_3100_1

my you are a jolly fellow this morning Martin... Next your going to tell me there is no Santa Claus...

HeliumAvid

I have been hearing rumors about this claus guy. Will try to get more info later today after I have my ultra sound.

What's a Bank Run?
And how do you get on the FDIC's secret problem list?
By Jacob Leibenluft
Posted Friday, July 18, 2008, at 5:15 PM ET
--------------------------------------------------------------------------------

Last week, California-based IndyMac became the largest bank to fail in two decades after a bank run depleted its deposits. Now, the Federal Deposit Insurance Corp.—which took over what's left of IndyMac—says that 90 financial institutions are on its secret list of "problem" banks. How does a bank end up on this secret list?

By getting a bad rating, based on its financial situation and visits from inspectors. Every few months, federal regulators issue banks a "CAMELS rating" that goes from one (for the safest banks) to five (for the most suspect). If a bank scores either a four or a five, then it's included on the list the FDIC compiles each quarter. (See Page 4 of this document [PDF] for the most recent disclosure of the size of the list and Page 20 for a brief discussion of the rating system.)

The exact data that go into a CAMELS rating are kept secret. (The acronym stands for capital, assets, management, earnings, liquidity, and sensitivity to market risk.) But the evaluation probably makes use of some information that's available to the public, like the size of a bank's "nonperforming assets"—loans and obligations that aren't getting paid back—and whether it has enough capital to deal with unexpected losses.

The FDIC won't release its problem list, and a bank isn't allowed to disclose its CAMELS rating, either. One major reason is that if the public knew which banks were in trouble, the likelihood of a "bank run" might go up. A run occurs when a bank doesn't have enough cash in its reserves to pay all those depositors who want their money back. To understand how this happens, start with a basic concept behind our banking system: A financial institution is required to keep only a small fraction of its deposits in reserve. This system allows banks to "multiply" the amount of money in circulation—increasing the amount available for investors to borrow, for example, and consequently stimulating economic activity. But it also means that if every depositor decided to liquidate his or her savings on the same day, the bank wouldn't be able to make the payouts.

Under normal circumstances, this almost never happens. But if a bank's customers believe that a bank is at risk of going under, they might rush to move their money elsewhere. This could happen because the bank is genuinely in trouble—say, it made a lot of bad mortgage loans. But even an entirely healthy bank can go under if enough depositors believe it to be unsafe. (For more on that case, read this classic paper [PDF] on the topic.) The FDIC was established during the Great Depression to limit the likelihood of a run: By offering insurance on deposits—up to $100,000 per depositor, in most cases—it makes people feel more secure in leaving their money in the bank. So, while bank failures still happen—at an average of just under five per year over the past decade—runs aren't very common. In IndyMac's case, the bank's problems stemmed from bad mortgage loans, but some regulators also blame the run on a public letter from Sen. Charles Schumer expressing concerns about the bank.

Even though you can't see the problem list, there are other ways to check on your bank's health. In addition to the financial filings the banks make with the FDIC, private firms like Bankrate have their own models that rank financial institutions using similar methods. And the mere fact that a bank shows up on the FDIC's trouble list doesn't mean it's likely to fail. According to research by FDIC economists (PDF), only a small percentage of the banks on the list actually go under. Changes in the banking industry may also make it more difficult for regulators to accurately model the risks of bank failure: After all, banks were once considered safer if they owned a lot of mortgages. That may explain why IndyMac wasn't on the FDIC's trouble list as recently as March 31.


Jacob Leibenluft is a writer from Washington, D.C.

Article URL: http://www.slate.com/id/2195524/