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The FDIC Deposit Insurance Fund and the difficult lives of regulators [ClearOnMoney]
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The FDIC Deposit Insurance Fund and the difficult lives of regulators

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Commentary

The FDIC Deposit Insurance Fund and the difficult lives of regulators

24 Nov 2009 by Jim Fickett.

The FDIC Deposit Insurance Fund now has a negative balance. Three years ago, when the FDIC assessed banks higher premiums to build up the fund, the American Bankers' Association complained bitterly that the banks were in “exceptional health” and the move was unnecessary and harmful. This illustrates the kind of pushback that regulators must deal with constantly. In this case, Sheila Bair, head of the FDIC, stood her ground. Unfortunately the pushback is often successful.

The FDIC released today the Quarterly Banking Profile for Q3 2009, which includes a summary of the state of the Deposit Insurance Fund (DIF). The DIF is the fund standing behind all FDIC-insured deposits. It now has a negative balance (click on chart for larger image):

Note that this does not mean insured deposits are in danger. While the negative balance does mean that estimated future losses slightly exceed current assets, new assessments are raising more cash, and the FDIC has a line of credit with the Treasury. (See http://www.fdic.gov/news/news/press/2009/pr09153.html for more explanation of the accounting.)

It is illustrative to take a look back in the boom times, at an exchange between the FDIC and the American Bankers' Association.

In 2006 the FDIC raised the premium rates that fund the DIF, in one of the more laudable regulatory actions of the year. The FDIC stated in a 2 Nov 2006 press release:

the FDIC has new flexibility to manage the deposit insurance fund's reserve ratio within a range, which in turn will help prevent sharp swings in assessment rates that were possible under the design of the former system. …

As a result of the final rulemaking, the FDIC today set the assessment rates that will take effect at the beginning of 2007. The new rates for nearly all of the industry will vary between five and seven cents for every $100 of domestic deposits.

As part of the Reform Act, Congress provided credits to institutions that paid high premiums in the past to bolster the FDIC's insurance reserves. As a result, the majority of banks will have assessment credits to initially offset all of their premiums in 2007.

“We are taking advantage of the sound banking environment to reverse the decline in the reserve ratio,” said Chairman Bair. “In keeping with the intent of Congress, we are building up the fund in good times so it can be drawn down when problems arise, thus providing for long-term stability in premiums.”

The American Banker's Association strongly criticized the move. They said, in their own press release the same day, entitled “NEW DEPOSIT INSURANCE PREMIUM RATES FAR TOO HIGH, SAYS ABA”:

“The ABA today expressed disappointment with the Federal Deposit Insurance Corp.’s decision … “The premiums are much too high considering the FDIC’s flexibility under the new system,” said James Chessen, ABA’s chief economist. “There is no requirement to boost the revenues of the fund – and no need to given the $50 billion in the fund already. The banking industry is in exceptional health, and there is no indication that large amounts of revenue are needed by the FDIC.” … “Additional money sitting idle in Washington adds little to the financial strength of the FDIC, but has real consequences for the communities that banks serve. That money would be better used supporting loans in the local community.””

“exceptional health”! Thank you, Sheila Bair, for not backing down.

Postscript 1: I ran across the ABA quote last year, at http://www.aba.com/Press+Room/110206premiumratestoohigh.htm, and saved it. Now the URL turns up a “page not found”. In addition, google has no cached page and the wayback machine turns up nothing. Perhaps the ABA was only tidying up. In any case, if you would like to read a longer statement by Mr. Chessen for yourself, check out the American Banker, volume 171, issue 207; page 11.

Postscript 2: Probably the most important news in the Quarterly Banking Profile was the following:

Net charge-offs continued to rise, registering a year-over-year increase for an 11th consecutive quarter. Insured institutions charged off $50.8 billion (net) in the quarter, an increase of $22.6 billion (80.5 percent) compared to the third quarter of 2008. Net charge-offs were higher, year-over-year, at 60 percent of insured institutions. The annualized net charge-off rate rose to 2.71 percent, from 1.43 percent a year earlier and 2.56 percent in the second quarter. This is the highest annualized net charge-off rate in any quarter since insured institutions began reporting quarterly income and expenses in 1984, and it marks the third time in the past four quarters that the net charge-off rate has reached a new high. [Emphasis added.]

It's not over yet.