You are here: Financial Institutions » The FDIC acknowledges it is to run out of money
Sheila Bair has run out of options to seize banks because the FDIC’s coffers are running dry. Now she either needs to tap taxpayer money via a loan from the Treasury or she has to raise funds through a special assessment on banks, who are already capital-constrained.
U.S. bank regulators are considering tapping a line of credit with the U.S. Treasury Department and may explore other lesser-known options to replenish the dwindling fund that safeguards bank deposits.
Federal Deposit Insurance Corp Chairman Sheila Bair said on Friday that the agency would meet at the end of the month to discuss options to rebuild the fund, which has been significantly drained by a sharp increase in bank failures.
"We are carefully considering all our options, including borrowing from Treasury," Bair said, referring to the agency’s $500-billion line of credit with the Treasury Department. She was speaking at a global finance conference in Washington.
But regulators are still reluctant to tap the line of credit because they want to avoid temporarily using taxpayer money to clean up the banking mess, she said.
Bair said the FDIC also had lesser-known alternatives for replenishing the fund, such as prepayments of assessments on banks and issuing a note. She did not give further details on those options.
Other options include more special assessments on banks. The FDIC has already charged the industry one emergency fee of $5.6 billion this year, and is authorized to levy two more.
A few comments are in order.
- Anyone could see this coming. Last month I indicated that there were not enough funds on hand in my post “The FDIC to draw on its line of credit at Treasury soon.” I said my piece there and in the post “The FDIC and the socialization of banking losses” about how this will socialize losses.
- Earlier in the week, Sheila Bair was telegraphing publicly that she was considering levying fees on banks to make up for the lack of funds. On Wednesday, Sheila Bair explained FDIC strategy to Maria Bartiromo, stating that she was considering getting the money to pay for seizing banks from other banks.
- Bartiromo asked Bair point blank whether it was wise to try and get the money from still solvent banks when they were capital constrained as this would restrict lending. Bair artfully dodged the question because she doesn’t have an answer for this.
- Having prudent banks pay up for the mistakes of their reckless brethren is the height of moral hazard. This would not be good policy.
Meanwhile the bankruptcies continued unabated. Here are 93 and 94 for 2009:
The FDIC and First Financial Bank entered into a loss-share transaction on approximately $2.5 billion of the assets of Irwin Union B&T Company and Irwin Union Bank, F.S.B. First Financial Bank will share in the losses on the asset pools covered under the loss-share agreement. The loss-share arrangement is projected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers.
Despite the phony stress tests, the end of mark-to-market, the bailouts, the huge money supply increase, the buying up of toxic assets by the Fed and all the other extraordinary measures, the U.S. banking system is still very, very weak.`
About Edward Harrison
Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.
Like us on Facebook
Follow Edward on Twitter
Latest Subscriber Posts
- Could the US economy accelerate higher in 2014
- Secular versus cyclical factors in equity markets
- Dealing with confirmation bias in macro analysis at market turning points
- Risk for Greece and European periphery from Ukraine crisis escalation mounts
- Economic and market themes: 2014-04-11 – Greece
- Thoughts on Greek bonds, Asian data and resource gamesmanship
- Edward Harrison’s Ten Surprises for 2014, Update 1
- Some thoughts on Ukraine, part 2
- Some thoughts on Ukraine, part 1
- Amazon’s new TV streaming strategy reinforces its incremental approach
- Relief rally in emerging markets
- European, Japanese, and Ukrainian-Russian deflation
- Economic and market themes: 2014-03-28
- The Chinese credit crisis gets messy
- US policy rates and financial stability
Recent Blog Posts
- Four key reasons for capex accelerating
- ECB Action: Just a Question of Time?
- On Europe’s move toward QE to prevent deflation
- The lower bound of central bank effectiveness
- Ten lessons from Charles Keating on corporatism and control fraud
- On the persistence of inadequate ideas like the money multiplier
- Can the Jobs Data Give the Dollar Another Leg Up?
- The US jobs market is healing
- Jumbos still cheaper than conforming mortgages
- Calm before the Storm?
- Eurozone credit contraction continues
- Emerging Market Equity Allocation Model for Q2 2014
- More Thoughts about Potential for QE from the ECB
- The big disconnect between leverage and spreads
- Interest rates and deflation
Daily Links Posts
- What do negative interest rates do?
- A Short History Lesson On Ukraine and Crimea
- Economic consequences of income inequality
- The BoE’s sharp shock to monetary illusions
- Marc Faber: China’s Malinvestment Unwind ‘Will Be a Disaster’
- Another Short History Lesson On Russia and Ukraine
- What are the differences between QE1, QE2 and QE3?
- The long decline of the Great British Pound
- Bank reserves and the falling loan to deposit ratio at US banks
- Four signs of economic slowdown in China
- Turmoil in emerging markets: What’s missing from the story?
- How money matters: The Old Lady fails to get an “A”
- The Dummy’s Guide to the US Banking Crisis
- On Europe’s move toward QE to prevent deflation
- The growing mess which will be left behind by the Abenomics experiment
- Chart of the day: US Manufacturing Employment, 1960-2012
- Bitcoin is not a currency
- Chart of the day: Dow 1928-1932
- More on the failure of Abenomics
- US commercial banks’ changing asset mix
-  No Good Greek Current Account Surplus w/Yanis Varoufakis and Tech w/ Alex Daley
-  The Death of Money with Jim Rickards
-  Paul Craig Roberts: IMF loans will hand Ukraine over to private banks
-  Bitcoin is maturing: Patrick Byrne & Jinyoung Lee Englund on the cryptocurrency
-  Tech Market Bubble? with Alex Daley and Howard Lindzon
-  March Jobs: Half Full or Half Empty? with Daniel Alpert and Max F Wolff
- Ann Pettifor on Constraints on Money Creation and Bancor
-  Big Banks and Political Power with Nomi Prins and Anthony Randazzo
-  Privatization of Space? and Big Banks in Foreign Policy with Nomi Prins
-  Crowdfunding Commercial Real Estate with Rodrigo Nino