Banks to Bailout FDIC?

About a year ago, during the height of the crisis, the government started bailing out the banks to help revive deteriorating credit and lending markets, but the situation is going to be reversed as the regulators are considering asking healthy banks to bail out the government soon, in order to replenish the declining fund of the Federal Deposit Insurance Corporation (FDIC) that insures regular deposit accounts when banks fail.

The tally of failed federally insured banks has reached 94 so far this year, causing a rapid decline in the FDIC’s deposit insurance fund as it has been appointed receiver for these banks. Despite imposing a special assessment charge on banks a few months ago, the FDIC’s cash balance now stands at a third of its size at the start of the year. As a result, the current move would be a great relief for the FDIC.

The bailout is necessary to replenish the deposit insurance fund, as it has slipped to 0.22% of insured deposits, below the mandated minimum of 1.15%.

The FDIC insures deposits at 8,195 institutions with roughly $13.5 trillion in assets. When a bank fails, it reimburses customers for deposits of up to $250,000 per account. The outbreak of failing financial institutions has significantly stretched the regulator’s deposit insurance fund. At June 30, 2009, the fund corpus fell to $10.4 billion, the lowest since 1993, from $13.0 billion in the prior quarter.

In the second quarter of 2009, the number of banks on the FDIC's list of problem institutions grew to 416 from 305 in the first quarter. This is the highest since the savings and loan crisis in 1994. Increasing loan losses on commercial real estate are expected to cause more bank failures
in the next few years. The FDIC anticipates the bank failures to cost about $70 billion over the next five years.

Though in May 2009 Congress more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund -- to $100 billion from $30 billion -- the FDIC is unwilling to use its authority to borrow from the Treasury. Any new borrowing from the Treasury would be considered a loan from the taxpayer that could push the industry to a political reaction, resulting in a wave of restrictions.

The FDIC Chairman last week said that the FDIC board would meet at the end of the month to consider options including taking Treasury funds, assessing fees on banks in advance and again increasing the fees they must pay.

As part of its $700 billion bailout program, the government provided capital to institutions in exchange for preferred stock and warrants to purchase common shares. Many of the financial institutions that have already repaid bailout money include JPMorgan Chase (JPM - Analyst Report), American Express (AXP - Analyst Report), Goldman Sachs (GS - Analyst Report), Morgan Stanley (MS - Analyst Report), Capital One (COF - Analyst Report), BB&T Corporation (BBT - Analyst Report) and US Bancorp (USB - Analyst Report). Also, banks like Bank of America (BAC - Analyst Report), Wells Fargo (WFC - Analyst Report) and Citigroup (C - Analyst Report) are expected to exit from TARP over the next 12 to 18 months.

The recent plan looks like a reverse bailout. Banks and their lobbyists have strongly supported the plan as instead of paying higher fees to support the FDIC, the banks would now lend money to FDIC which might be accretive to their earnings.

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