- The Washington Times - Sunday, September 21, 2008

The number of troubled banks has risen sharply in recent months, and the Federal Deposit Insurance Corp.’s insurance fund has dipped below the minimum level established by Congress, but there is little chance that taxpayers will be called upon to make up any shortfall.

If a slew of bank failures required the FDIC to tap its line of credit at the U.S. Treasury Department to pay off depositors of failed commercial banks and thrift institutions, the premiums paid by the remaining banks would be more than adequate to repay the loans, analysts said last week.

Appearing at the White House on Friday with Treasury Secretary Henry M. Paulson Jr. and Federal Reserve Chairman Ben S. Bernanke, President Bush tried to reassure average investors that their money in savings and checking accounts is insured and won’t be lost.

“The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit, and this will not change,” he said.

Private-sector experts agreed. “There is no long-term problem at the FDIC,” said Christopher Whalen, co-founder and managing director of Institutional Risk Analytics, which rates banks and thrifts for private clients.

Bert Ely, who has specialized in deposit-insurance and banking-structure issues since 1981, agreed. “The most important thing to keep in mind is that the FDIC fund is a fiction, just like the Social Security trust fund,” he said. “What is key is the capacity of the banking industry to pay the higher deposit-insurance premiums needed to cover bank-failure losses. That capacity exists.”

Mr. Ely said it was “highly unlikely” that the FDIC’s deposit-insurance system will prove inadequate. “We don’t have the same situation going on today that we had when the savings and loan crisis erupted in the 1980s,” he explained. “Savings and loans were borrowing short and lending long, which is what the investment banks are doing today.”

Citing better balance sheets and a better regulatory regime, Mr. Ely said, “Banks today are fundamentally sounder than S&Ls in the 1980s. There is absolutely no comparison.”

Separately, the Treasury announced Friday the establishment of a temporary guarantee program for money-market mutual funds. President Bush authorized the Treasury to use up to $50 billion in the Depression-era Exchange Stabilization Fund to insure money-market mutual fund holdings over the next year.

At the end of June, the FDIC’s Deposit Insurance Fund held $45.2 billion, which was $6.1 billion below the congressionally targeted minimum level of $51.3 billion, according to LaJuan Williams-Dickerson, an FDIC spokeswoman. The minimum level is based on a percentage of insured deposits between 1.15 percent and 1.25 percent. At the end of June, the $45.2 billion insurance fund represented 1.01 percent of insured deposits, which totaled about $4.4 trillion, according to Andrew Gray, an FDIC spokesman. At the end of March, the fund held 1.19 percent of insured deposits.

When the insurance fund falls below its minimum level, the FDIC is required by law to raise the premium rates, Mr. Gray said.

FDIC Chairman Sheila Bair told the House Financial Services Committee on Thursday that the agency planned to unveil new risk-based premiums in October. Institutions that rely heavily on brokered deposits or secured lending would have to pay higher premiums, while those with relatively high capital levels and that issued subordinated debt would pay lower premiums.

“We want to provide positive incentives for them to change their risk profile,” Mrs. Bair said.

Mr. Ely said there was no clear way to determine precisely how the additional costs of higher premiums would be distributed, but he said they would be passed through to depositors, borrowers and shareholders. “A higher premium is just another expense item in operating cost to be recovered,” he said.

Eleven banks have failed so far this year. Several of those failures occurred among “outliers, like IndyMac, which were engaging in very risky practices,” Mr. Ely said. At the end of the second quarter, the FDIC considered 117 banks and thrifts to be in trouble. That was an increase from the 90 institutions on the list at the end of the first quarter. The cumulative assets on the books of the troubled banks and thrifts tripled from $26.3 billion on March 31 to $78.3 billion on June 30, including $32 billion in assets at IndyMac, which failed in July.

IndyMac, a California-based thrift, was not on the FDIC’s March 31 problem list. “Well, they didn’t know Senator [Charles E.] Schumer was going to send out a letter scaring the [devil] out of depositors,” observed Gary Townsend of Chevy Chase-based Hill-Townsend Capital.

The latest estimates indicate the IndyMac failure will likely cost the FDIC between $4 billion and $8 billion, said Ms. Williams-Dickerson, of the FDIC. She added, “We do not anticipate there will be enough failures to deplete the insurance fund,” which held $45.2 billion at the end of June.

Just in case, however, the FDIC has a line of credit at the Treasury, Ms. Williams-Dickerson said. Mr. Gray, also of the FDIC, stressed, “The FDIC is backed by the full faith and credit of the U.S. government.”

Concerns over the adequacy of the FDIC insurance fund were heightened as the stock price of Washington Mutual, the nation’s largest thrift with nearly $310 billion in assets at the end of June, plunged to about $2 in recent days. Early last year, before the credit crisis erupted, Washington Mutual’s stock fetched $46 per share. After earning an average annual profit of $3.5 billion during the 2003-06 period, Washington Mutual lost $6.3 billion during the last three quarters.

The current level of $45.2 billion in the FDIC’s insurance fund is “irrelevant,” Mr. Whalen said. “When the amount gets to zero, then the FDIC will run a tab with Treasury to get the cash they need to do their job.” When the banking and thrift industries recover, the premiums they pay to the FDIC for deposit insurance will be sufficient to retire the FDIC’s debt with the Treasury, he said.

Pete Davis, president of Davis Capital Investment Ideas, said it was possible that enough bank and thrift failures could deplete the FDIC’s insurance fund. “But there’s not going to be a direct hit to taxpayers if FDIC needs to borrow from the Treasury,” he said. Insurance premiums are set at levels to keep the FDIC adequately funded over the long term, he explained.

Mrs. Bair said, “If need be, we can potentially raise very large sums of working capital though the Federal Financing Bank, which would be paid back as the FDIC liquidates assets.

The FDIC’s need to draw on the Treasury “will depend primarily on the pace of bank failures and how fast we sell failed-bank assets,” Mrs. Bair said. “The public should understand that we have multiple tools at our disposal to maintain our insurance guarantee.” That covers up to $100,000 in savings and checking accounts and in certificates of deposit; up to $250,000 in certain retirement accounts; and $100,000 each for joint spousal accounts, Mr. Gray said.

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