The FDIC is broke

Discussion in 'Economics' started by wildfirepow, Aug 27, 2009.

  1. In the first year of the Great Depression, unemployment reached 8.7 percent. The present unemployment rate is 9.4 percent. As I have shown previously in this column, bank failures in 2008 and 2009 are also worse than they were in 1930 and 1931 when measured in terms of bank deposits rather than the number of banks. Since that July column was published five weeks ago, 28 more banks have failed and driven the percentage of failed bank deposits up to one percent, which is more than I'd projected for all of 2009. At the current rate, bank failures over the last two years will equal 4.65 percent of total bank deposits, which is more than twice the two percent of failed deposits in 1930 and 1931.

    Despite these widespread banking collapses, the American public has remained relatively quiescent, mostly because they believe their deposits are safely insured by the Federal Deposit Insurance Corporation. The problem is that the FDIC has now run out of money; the losses caused by the 81 bank failures this year has completely exhausted the Deposit Insurance Fund. At the beginning of 2008, the DIF had a balance of $52.8 billion. At the end of the year, during which 25 banks failed and caused $17.9 billion in FDIC-estimated losses, the fund was down to $17.3 billion.

    At this point, I should mention that some observers of the banking system are careful to point out that it's not correct to simply subtract estimated losses from the reported DIF balance because the FDIC brings in money every quarter through the insurance premiums it charges. This is true, but on the other hand, it's even more important to remember that estimated losses reported are merely estimates. An examination of the last five quarters shows that the net impact of a bank failure on the DIF balance is approximately twice the level of the estimated losses. For example, the $2.3 billion in estimated losses from the 21 bank failures reported during the first quarter further reduced the insurance fund by $4.3 billion, to $13 billion. What has happened since then can be seen in the chart below, which shows the FDIC's running fund balance with each of the subsequent 60 bank failures that occurred after March. The blue bars are based on estimated losses reported, while the red bars are based upon projected fund balance reductions, which over the last five quarters have been 1.94 times greater than the estimated losses.

    While the FDIC does have the ability to borrow money from the U.S. Treasury, the chart shows that for the first time in its history, it has been forced to tap its $30 billion credit line. And while Congress can elect to intervene and bail out the FDIC as it bailed out the banks and other institutions, contrary to most depositors' assumptions, it is under no obligation to do so. An advisory opinion posted on the FDIC's own site makes it clear that the so-called federal guarantee is nothing more than non-binding reassurance made for the public's benefit.
  2. You realize that you are stomping all over Bylo's turf by starting these threads right?
  3. FDIC will in the foreseeable future will never go broke. If just one person loses money in their insured account it can create a run on the banks.
  4. A total of 416 banks with combined assets of $299.8 billion failed the Federal Deposit Insurance Corp.’s grading system for asset quality, liquidity and earnings, the most since June 1994, the Washington-based FDIC said in a report today. Regulators didn’t identify companies deemed “problem” banks.

    FDIC-insured banks reported a net loss of $3.7 billion in the second quarter, compared with a $5.5 billion gain in the first quarter. The loss, the second quarterly one the industry has reported in 18 years, was driven by increased expenses for bad loans, the FDIC said.
  5. CET


    They will just raise the fees they charge the banks still in operation to raise more capital. The FDIC is not going anywhere.
  6. promagma


    Conflicting info here?
    (I don't trust WorldNetDaily)

    "Starting in 1930 and continuing through 1933, almost 9,100 commercial banks failed with deposits of $6.8 billion. The deposits of these failed banks represented 13.3% of total commercial bank deposits as of 1929."

    By that, 4.65 percent in 2 years isn't too bad compared to 13.3% in 3 years?
  7. MattF


    They could, true, but if you start having a several week min-run where 3-5 banks fail each week...(which hasn't happened yet, as there have been quiet weeks)
  8. FDIC Quarterly report

    Here are the highights from it.

    Higher Loss Provisions Lead to a $3.7 Billion Net Loss

    More Than One in Four Institutions Are Unprofitable

    Charge-Offs and Noncurrent Loans Continue to Rise

    Net Interest Margins Show Modest Improvement

    Industry Assets Decline by $238 Billion