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FDIC Fund to Be in Red for Years as Bank Failures Jolt System
• WSJ"Though some of our largest bank failures have already taken place, there are still hundreds and hundreds of banks that are going to fail in this cycle," said Gerard Cassidy, a bank analyst at RBC Capital Markets.
FDIC officials stressed that the fund's depleted state wouldn't affect depositors because federally insured deposits are backed by the full faith and credit of the U.S. government.
The prepayment proposal was met with unexpected support from banks. Some saw it as preferable to another option the FDIC seriously considered -- an emergency charge of $5.6 billion on top of the regular fees. This would have likely come directly out of the capital reserves at thousands of banks.
FDIC officials said banks would be able to spread the impact of the fee prepayment over several years by the way they account for it on their balance sheet.
J.P. Morgan Chase & Co. Chief Executive James Dimon, in an interview, praised the FDIC's plan as "an elegant way for them to do it."
The FDIC said that without the new policy, its cash on hand would be outpaced by its cash needs sometime early next year. Bank failures are expected to hit their peak either this year or in 2010.
See the FDIC's deposit insurance fund balance over time.
The FDIC continues to have cash even though its deposit insurance fund has fallen into the red. It has already taken more than $30 billion out of the fund to cover bank failures over the next year. This is the money that is expected to run dry early next year without the prepayment assessments. FDIC officials estimated the deposit insurance fund wouldn't be back to comfortable levels until 2017.
Government officials on Tuesday estimated that bank failures from 2009 through 2013 will cost the FDIC $100 billion, up from a projection several months ago of $70 billion. Ninety-five banks have failed so far this year.
The FDIC's proposal reflects a growing recognition from government officials that more money will be needed to mop up the mess than they projected just months ago. It is also a stark reminder of how the banking sector continues to be strangled by bad loans.
There have been bank failures in most states since January 2008, hitting Georgia, Illinois and California particularly hard. The FDIC had 416 banks on its "problem" list at the end of June, and the number is expected to grow.
Another option the FDIC considered was to borrow billions of dollars from the Treasury Department. Officials felt such a move would send the wrong message to the public.
"I do think that the American people would prefer to see an end to policies that looked to the federal balance sheet as the remedy to every problem," FDIC Chairman Sheila Bair said.
But for the first time, Ms. Bair said Tuesday that she had directed the agency to prepare the "mechanics" for borrowing from the Treasury in case it ever became necessary, although "today is not that day."
The evaporating deposit-insurance fund had $10.4 billion in June, the latest figure available, down from $45.2 billion in June 2008. That posed a public-relations problem for Ms. Bair. She has had to both move rapidly to close failing banks, which is costly for her agency, while retaining public confidence in the FDIC.
The rising number of bank failures has infuriated some politicians who have recently begun pressuring Ms. Bair's regulators to ease up on their increasingly close supervision of the industry.
The FDIC said banks could ask for an exemption if they didn't have the cash on hand to prepay the fees.