Dedicated to Deposits: Deals, Data, and Discussion

FDIC Releases Plan for Banks to Bolster FDIC Deposit Insurance Fund

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The FDIC announced today how it expects to replenish the Deposit Insurance Fund. According to the FDIC press release they will
require insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the total prepaid assessments collected would be approximately $45 billion.

The FDIC had considered other ways to replenish the DIF including special assessments and borrowing from the Treasury. As Chairman Sheila Bair mentioned in the press release, borrowing from the Treasury was not a good option:
The decision today is really about how and when the industry fulfills its obligation to the insurance fund. It's clear that the American people would prefer to see an end to policies that look to the federal balance sheet as a remedy for every problem.

And according to the FDIC, the prepayment option should have less impact on the banks compared to a special assessment:
The banking industry has substantial liquidity to prepay assessments. As of June 30, FDIC-insured institutions held more than $1.3 trillion in liquid balances, or 22 percent more than they did a year ago. Prepaying assessments will put the industry's liquid balances to good use in conserving capital and helping to maintain the capacity of banks to lend while they rebuild the DIF.

According to this MarketWatch article, without prepaid premiums, the DIF "would face a liquidity crunch early next year, and that it will be operating in the red by the end of this month."

The FDIC provided an estimate of the cost of bank failures through 2013 in this memorandum:
Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009. Staff projects that most of these costs will occur in 2009 and 2010.

Should Bank Depositors Worry?

In the FDIC press release, Bair made sure to stress that bank customers shouldn't worry about the DIF:
First and foremost, bank customers should know that their insured deposits have and always will be 100 percent safe, no matter what. This commitment to depositors is absolute.

Although customers of failed banks this year didn't have to worry about losing their insured deposits, they did have other things to worry about such as having to wait for their deposit checks in the mail (examples from Corus Bank's failure) or having their CD rates slashed (example from Irwin Union Bank's failure).

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Comments
12 comments.
Comment #1 by Anonymous posted on
Anonymous
When banks start paying higher FDIC insurance, they will conveniently cut all interest rates across the board from the customers and make up for the difference.
We, the people, will pay for it. The cost to the banks will be $0 (zero).

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Comment #2 by Anonymous posted on
Anonymous
Bank profits are going to be hurt. Make no mistake about it. The real problem is this 3 years prepay is not near enough. It needs to be 10 years prepay.

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Comment #3 by Anonymous posted on
Anonymous
I also agree with the first poster that the bank's cost will be passed onto the customers. For sure we will pay our own FDIC insurance.

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Comment #4 by Anonymous posted on
Anonymous
The way this administration is shaping our lives, pretty soon we will pay for every **** insurance that will exists, from health-care to bank-care. Where we will find money for all those insurances and they all will be mandatory payments.
God bless.

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Comment #5 by scott (anonymous) posted on
scott
One of the plans was for FDIC to borrow money from banks for the fund. Thought that would be a good Idea, Banks make very secure loans and in return give some better deposit rates to bring in money. As usual something that makes sense fails when it comes to our Government

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Comment #6 by Anonymous posted on
Anonymous
The poster above me is retarded. If the FDIC borrowed money from banks, that money would have to be paid back. From where? Either bank assessments (which comes out of the customer's pocket ultimately) or tax dollars (which comes out of the customer's pocket ultimately).

Sad to say, but TANSTAAFL.

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Comment #7 by Anonymous posted on
Anonymous
replenish? The Wall Street Journal says "has fallen into the red and will remain there into 2012", so more like trying to keep from falling too far into the red.

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Comment #8 by Anonymous posted on
Anonymous
I think FDIC will stop closing banks soon for lack of money. It does not make any sense to take advance money for 3 years from a bank and then to turn around and close that bank.
It's catch 22 for FDIC, the more banks go out of business the less money will come to them do to the write off of the failed bank assets.

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Comment #9 by ctgottapee (anonymous) posted on
ctgottapee
the notion that banks will pass all costs on to customers doesn't hold wait. while any business determines it product structure based on costs, it is also heavily based on competition. banks that need cash will offer generous rates regardless of this prepayment. remember it is a prepayment, which is only costing the bank the difference between expected revenue/will that could be generated if they kept that money until each quarterly payment.

besides, the FDIC can get payments from the banks before they go under ;)

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Comment #10 by Ryan (anonymous) posted on
Ryan
Just another fine example of banks making stupid decisions and getting bailed out for it. It always falls on to the people. Banks won't absorb this cost they are just going to pass it on to there customers.

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Comment #11 by Anonymous posted on
Anonymous
To ctgottapee
Your logic is shallow and is based on assumptive rather than facts.
Why would banks pay the premium to FDIC, in advance, when they know they are on the short list to be closed (about 400 banks).
The assets in those 400 banks is estimated of about $800 Billions and FDIC is soliciting money from them in order to be closed. This is a voluntary request by FDIC and can not force any bank to pay the premium in advance.

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Comment #12 by Hal (GT) (anonymous) posted on
Hal (GT)
In my opinion it's a shell game to make the big banks look good balance sheet wise because they can report the payments as an asset. Thus looking better on Wall Street.

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