Tuesday, September 15, 2009

The FDIC's Balance Sheet

A few days ago, I made mention of the FDIC's contingent liability for future failures. It was mentioned in a speech by the Chair of the FDIC. I looked into this and came away with the following:

The balance of the Deposit Insurance Fund is kind of like the FDIC's capital. As of 6/30/09, the FDIC held about $64.8 billion in assets. Liabilities (including the one mentioned above) totaled about $54.4 billion. The fund balance was the difference: $10.4 billion.

In an accounting framework: assets = liabilities + capital

It seems to me that the FDIC creates reserves against payout events. The monies shift from the fund balance (capital) to the liability column. As the payouts actually occur, the FDIC decreases the liability and decreases assets.

As of 6/30/09, $32 billion sits in this contingent liability for future failures. The key issue then becomes the amount the FDIC is able to salvage from the banks that collapse. If the payout events are lower than anticipated, I guess that the FDIC can shift part of the balance out of the liability, back into the capital category. Has the FDIC been conservative enough? How likely is this outcome? Based on their past actions, I would say that recoveries will be dwarfed by new events.

In conclusion, we need to monitor both the fund balance and contingent liability to assess the (poor) health of the FDIC.


Of course, this Fund backs over $4.8 trillion in insured deposits. That $4.8 trillion is a low-ball estimate because it is based on the $100,000 limit, not the current $250,000 limit. Let's not forget the other programs & guarantees that the FDIC now provides as well. Your money in the bank is safe, but who will foot the bill? YOU WILL !!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!! The FDIC has actually promoted high risk taking behavior and needs to be dramatically alerted to fulfill its advertised purpose.

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