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
- Google no longer able to pay Android developers in Argentina, pulling apps on July 27th http://t.co/ZajGwnBEsT # 2 hours ago
- Monetary policy is not interest rate policy - Japanese version http://t.co/MnWl08W8vP # 2 hours ago
- @EamonDelaney10 @tconnellyRTE I remember it well. DC - my hometown! # 16 hours ago
- RT @BuzzFeedAndrew: I wish Rob Ford would have come out and said "I love smoking crack. I smoked crack before this press conference." # 18 hours ago
- Links: 2013-05-24
- Links: 2013-05-23
- On the Fed’s tapering and the volatility in Japan
- On European rebalancing and Germany’s excess savings
- Links: 2013-05-22
- Excess German savings, not thrift, caused the European crisis
- On Greece’s eventual exit from the eurozone
- Links: 2013-05-21
- On Germany’s response to Euroland’s problems
- Germany is willing to accept a higher inflation target but does it matter?
- Links: 2013-05-20
- Links: 2013-05-19
- Links: 2013-05-18
- Links: 2013-05-17
- Full text: Moody’s upgrades Turkey’s government bond ratings to Baa3, stable outlook
- Some thoughts on Canada’s housing market
- On big data and why Google’s Android is winning and fragmentation is no longer a problem
- Links: 2013-05-16
- Europe’s sinking economy
- Links: 2013-05-15
- Has house price deflation begun in Canada?
- Portugal’s Japanese Problem
- Feedback Loops
- The real experiment that is being carried out in Japan
- Android is killing iOS with nearly 75% share in Q1 2013
- Kyle Bass gets it wrong on Japanese bonds
- On claims of depositors, subordinated and creditors and central banks in bank resolutions
- Money is Gold
- Massive Iceberg Ahead for the European Monetary Union
- On Japan’s widowmaker trade and Reinhart and Rogoff
- Why the Reinhart-Rogoff paper was flawed right from the start
- A reality check on German household wealth
- Buiter: Most European banks are zombies
- On the crash in gold
- The Need for Wholesale Change
- What are the differences between QE1, QE2 and QE3?
- Spain’s economy is in tatters
- Buiter: ‘it was clear that Cyprus was a laboratory’
- In the long run we are all in trouble
- Deposit insurance after Iceland and Cyprus
- The largest European banks by assets
- Why Germans are poor
- Chart of the Day: Debt Deflation in the Eurozone
- How bond market vigilantes force rates higher
- Has house price deflation begun in Canada?