December 1, 2009 – Fifty banks failed in the third quarter of 2009, causing the Deposit Insurance Fund, which insures deposits at the nation’s banks and thrifts, to drop into the red. It is the second time in the fund's history that it has fallen below zero. (In 1991, the Fund's balance dropped to $-7 billion.) The Federal Deposit Insurance Corporation announced last week that the fund had dropped from $10.4 billion at the end of the second quarter, to $-8.2 billion, as of September 30.
October 2, 2009 – In an unprecedented move this week, the Federal Deposit Insurance Corporation is asking banks to prepay their quarterly fees for the next three years in order to stem steady losses to the fund that backs accounts when an insured bank or thrift fails. Ordinarily, financial institutions pay fees to the FDIC each quarter to support the fund, which insures deposits at banks and thrifts up to $250,000.
According to the latest FDIC estimates, the Deposit Insurance Fund (DIF) went into the red on Sept. 30. FDIC officials stressed that deposit insurance coverage is unaffected by a negative balance in the DIF.
When a bank fails, the FDIC protects depositors using FDIC cash resources, which includes assets and securities, and a yet-to-be-tapped $500 billion line of credit with the Treasury Department. The DIF balance is similar to a cash position, or a statement of the amount of cash a firm has at a specific point in time, said FDIC spokesman Andrew Gray.
The DIF is projected to remain in the red until 2012 primarily because of an accounting mechanism the FDIC is using to keep track of the prepayments. The FDIC Board of Directors said that if banks prepay their fees for the fourth quarter of 2009, and all of 2010, 2011, 2012 – by December 30 of this year, along with their regularly scheduled third quarter fee payment, the FDIC will have an additional $45 billion to cover bank failures. This is approximately the amount the Deposit Insurance Fund held prior to the global financial crisis.
Subsidyscope has been keeping track of each bank and thrift failure as it happens. Since June 30, Subsidyscope estimates that the fund has diminished an additional $14.9 billion with the failure of 44 financial institutions. There have been 89 bank failures this year.
FDIC Chairman Sheila C. Bair said this week that there is enough liquidity in the banking sector to cover the proposed mandatory prepayment.
"The decision … is really about how and when the industry fulfills its obligation to the insurance fund," Bair said. "In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer."
The proposed prepayment rule includes a clause that allows the FDIC to exercise discretion and exempt certain institutions from prepayment if it would significantly impair the institution’s liquidity or create a significant hardship. The names and number of exempted institutions will not be made public. Requiring prepaid assessments would also not preclude the FDIC from changing assessment rates or from further revising the risk-based assessment system from 2009-2012.
In addition to regular fees, the FDIC has also imposed an emergency fee this year which brought in $5.6 billion. The fund’s line of credit from the U.S. Treasury could also be tapped if fees were insufficient to cover losses. History shows that support from the Treasury can be important. In the 1980s, a separate Treasury-backed fund that insured deposits in savings and loans became insolvent, a victim of a thrift crisis that, by some estimates, cost taxpayers about $125 billion. That fund was abolished in 1989. For more details, click here.
The proposed rule has been put out for public comment. The public has until October 28, 2009, to submit comments. Visit the FDIC Federal Register comments page to participate.