FDIC Problems
Today, Bloomberg is reporting that the FDIC Proposes Banks Prepay Fees Through 2012, Raise $45 Billion
Sept. 29 (Bloomberg) -- The Federal Deposit Insurance Corp., seeking to replenish deposit reserves as banks fail at the fastest pace in 17 years, today voted unanimously to have lenders prepay fees through 2012, raising about $45 billion.
Lenders would prepay FDIC premiums for the fourth quarter and next three years on Dec. 30, to replenish the deposit insurance funds that staff estimated will have a negative balance at the end of this quarter, the agency said.
One just has to ask, what happens in 2010, 2011, and 2012 when the FDIC needs money, but banks have already pre-paid through these years? What will the FDIC do then? Charge banks fees through 2020?
I, for one, don't think that the worst is yet behind us. Even if it is, I am expecting that the deleveraging process may last a decade or more, just as it has in Japan. Unemployment will remain high as we go through a "jobless recovery," and spending (and thus company earnings) will remain lower than the during the peak that we reached in late 2007. This will not be good for banks (at least banks that took on too much risk…which seems to be most of them), and it will no doubt lead to more bank failures.
But Will They Need More?
Even if this does happen, and the FDIC gets their $45 billion, is that enough? From the following table on the FDIC's website, we can see that as of 6/30/2009, all FDIC-insured institutions in the States have about 13.3 Trillion in assets, about 11.8 Trillion in liabilities, and just over 9 Trillion in deposits.
Looking at these numbers, it is easy to see that the FDIC is walking on eggshells. 45 Billion won't even cover 1 percent of the insured assets, and that doesn't leave much wiggle room. Credit default risk has soared during this crisis, though recently the bond markets are making it seem as if risk has receded. I do not think that risk has receded, and I am expecting corporate bond rates to rise again as the economy takes another dip. If the credit risk does rise again, it is not even remotely hard to imagine the FDIC being on the hook for much more than $45 billion.
Do We Need the FDIC?
This may lead some to pose the question "Do we really need the FDIC?" Of course my answer to this question is "absolutely not." The FDIC is one of the facilitators of the current mess we are in. FDIC insurance gives depositors confidence in all banks equally (as long as they are FDIC insured, of course). But in reality, some banks are more stable than others--some banks make wiser investments than others. All of these things would normally be taken into account when a depositor decides which bank his or her money should reside in.
If a depositor picks a bad bank, they run the risk of losing their money. This puts a lot of responsibility on the banks to prove that they are worthy of people's deposits, and it also puts responsibility on the depositor to research banks, and know what banks are really up to. Neither of these is a bad thing. It would lead to a depositor base that is more educated about what is going on at banks, and it would also mean that banks taking lots of obvious risk would not get as much capital to play with (assuming people are paying attention).
Essentially, under the current FDIC system, a bank taking ridiculous risks with depositors money will get just as many depositors (if not more), than a bank that is being careful and diligent with depositor's money--they may even offer higher interest rates on deposits to entice people, which brings about more risk to the bank! This amounts to taxpayer subsidization of deposits at these risky institutions because eventually the ball has to drop; it always does. When this happens, taxpayers, as well as other banks who may have done nothing wrong, help foot the bill.
The FDIC is trying to raise money as they go, flying by the seat of their pants. I suspect they are aware of the very high likelihood that they will need to raise even more money again. In fact, this is not the first time during this crisis that they've had to find ways to get more money from taxpayers and banks. I hope those in congress will start spending time figuring out how to slowly get rid of the FDIC rather than contemplating how to sell off our future to fund them now.