Wednesday, October 1, 2008

Federal Deposit Insurance Corporation

The FDIC is a Federal agency, created by Congress via The Banking Act of 1933. One of the charges of the FDIC is the insurance of member institution's deposits. The FDIC collects insurance premiums to maintain the Deposit Insurance Fund (DIF). The assets of the Fund consist of mainly U.S. Treasury securities (77%), cash & cash equivalents, accounts receivable and minor real estate holdings. The FDIC also has access to $30 billion by way of a credit-line provided by the U.S. Treasury Department.

The FDIC has been in the news lately for two main reasons: financial health of the DIF and its potential role in the Emergency Economic Stabilization Act of 2008 (EESA). First, the FDIC's health...

As of 6/30/08, the DIF held $45.217 billion in assets. Its potential claims, i.e. the amount of insured deposits, stood at $4.46 trillion. This is a reserve ratio of 1.01%. The Designated Reserve Ratio (DRR) is 1.25%. The DRR functions as a target for the FDIC and is reviewed annually. There is no mandate to reach the DRR by a certain time, it is merely an indicator of potential increases in premiums or rebates by the fund. By statute, the FDIC must devise a plan replenish the fund within 5 years when the ratio drops to 1.15%. The FDIC estimates that the bank failures since 6/30/08 will deplete the DIF by another $1.84 billion (the DIF reserved $10 billion of insurance loss provisions for the IndyMac failure in the second quarter).

The DIF does not look good to me:

-- it holds fewer assets than it did in December, 2004, yet insured deposits have increased by over $800 billion

-- FDIC insured institutions held $163 billion in non-current loans and $112 billion in loans 30-89 days past due

-- Home prices continue to fall (see Case Shiller post)

-- Although the absolute size of most of this year's failures is manageable, the estimated loss to the FDIC as a percentage of the banks' assets (excluding WaMu) is staggering: 25.6%

I would not be surprised to see the FDIC call on that $30 billion credit-line.

It has been proposed in the Senate that the EESA include an increase in the FDIC insurance limit (lift the cap from $100,000 to $250,000). This, they reason, will prevent a run on bank deposits. I submit that this will be ineffective. Total deposits of FDIC member total $8.57 trillion. Of that amount, $1.54 trillion is not even eligible for deposit insurance (foreign office deposits). So that $1.54 trillion could still walk if the limit was raised.

Of the $7.03 billion in domestic deposits, only $4.5 trillion is insured. So another $2.53 trillion would still go bye-bye if the depositors didn't trust the bank. Deposit accounts of $100,000 or less accounted for $3.24 trillion, so they have no reason to start a run in the first place.

As much as I do not want to say this, either insure ALL deposits or don't waste time with these weak resolutions.

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