Dedicated to Deposits: Deals, Data, and Discussion

FDIC Prepares for More Bank Failures

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On the same day of the Fed's historic rate cut, the FDIC made some important announcements. The first press release reported new assessments for banks. The premiums it charges banks for deposit insurance will go up substantially starting in the first quarter of 2009:
Currently, banks pay between 5 and 43 basis points of their domestic deposits for FDIC insurance. Under the final rule, risk-based rates would range between 12 and 50 basis points (annualized) for the first quarter 2009 assessment. Most institutions would be charged between 12 and 14 basis points.

The FDIC is also discussing a change that will require riskier institutions to pay a larger share of the premiums. These changes are designed to protect the deposit insurance fund amid the weakening economy, but they're probably not good for depositors. It seems likely that the banks will pass these higher premiums to customers resulting in lower deposit rates.

The second press release shows why the new assessments are necessary. The FDIC reported on a large reduction of the Deposit Insurance Fund:
The FDIC also announced that in the third quarter, the Deposit Insurance Fund (DIF) decreased by 23.5 percent ($10.6 billion) to $34.6 billion (unaudited). The reduction in the DIF was primarily due to an $11.9 billion increase in loss provisions for bank failures, which represents the estimated losses for FDIC-insured institutions that are likely to fail over the next 12 months.

The press release also reported that the FDIC approved a $2.24 billion budget for 2009 which is almost twice the 2008 budget:
The 2009 budget represents an increase of more than $1 billion from 2008. ... The increase in spending is largely attributable to continuing work associated with recent bank failures and the provision of contingency funding for the possible continuation of an elevated number of bank failures in 2009.

There have been 25 bank failures so far this year (there were two last Friday), and it appears the FDIC is preparing for many more.


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Comments
7 Comments.
Comment #1 by Anonymous posted on
Anonymous
Unaudited?! Continuation of a eleavated number of bank failures in 2009! WTF! Unaudited?! How does uninsured deposits sound? How about insured deposits with no funds in the federal deposit insurance corporation. Would you get 100% of your money back even if it is under $100,000? Bank failure? FDIC failure WTF?

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Comment #2 by mk (anonymous) posted on
mk
quote "It seems likely that the banks will pass these higher premiums to customers resulting in lower deposit rates."

It is unlikely that institutions in trouble can lower their rates just because FDIC charges them more. If they do, they will not get any deposits. Right now, for example, GMAC Bank pays higher than BofA because GMAC Bank is riskier. Without FDIC insurance, most of their current depositors will leave. Now, if GMAC Bank lowered rates because they have to pay more to FDIC, some more depositors will leave.

So, banks like GMAC Bank will either have to improve their image to attract more cautious depositors, and/or improve efficiency to lower costs that keeps paying higher interest profitable.

Trust me, if GMAC Bank thought that they could get enough deposits by paying a .05% less, they would.

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Comment #3 by Anonymous posted on
Anonymous
I agree with the second poster. However, I do expect to see more and more banks increasing and creating new fees for certain things. We will need to keep an eye out.

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Comment #4 by Anonymous posted on
Anonymous
What does all this mean for elderly savers who depend upon decent interest rates for income. The government is so concerned about everyone else but no one seems concerned about "savers"!

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Comment #5 by Anonymous posted on
Anonymous
The saver will have to look for more riskier investments if they want more return on their money. The Fed is not concerned with inflation now so rates will drop. Unemployment and a recession are important issues to the Fed than savers needing to make enough money to get buy. Remember, jobs (and taxes) pay for the government. Investment income does not generate as much revenue as a tax paying person. So the same scenario like back in 2003 with very low rates are on the horizon again.

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Comment #6 by Anonymous posted on
Anonymous
By Anonymous, at 5:18 PM, December 17, 2008

I am afraid you are exactly right!
People like mayself and a lot of others dependent on interest from safe insured accounts for income are looking at a very bleak picture on the horizon. For how long, is anybody's guess. The economic picture is very grim to say the least.

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Comment #7 by Anonymous posted on
Anonymous
Looks to me like the same financial cycle from back in 2001-2003 is going to be repeated. In order to avoid a severe recession, rates will drop reducing the savings rate and borrowing rate. Then investors will be roaming around looking for more higher paying investments (maybe like say, subprime packaged securities?). Then a lot of people start to borrow again pushing rates back up. Then, the investor gets the rug pulled out from under him again.

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