The FDIC’s money troubles

What happened

The Federal Deposit Insurance Corp. reported that its fund to insure bank deposits has dropped to $10.4 billion, down from $45.2 billion a year ago and its lowest level in 16 years, as 81 banks failed this year, including 45 in the second quarter alone (The New York Times).

What the commentators said

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“The headlines look scary,” said Theo Francis in BusinessWeek, “but before you stash your savings in your mattress,” let’s take a closer look at those numbers. The $10.4 billion is what the FDIC expects to have left after a rash of future bank failures—its projections could be off by 50 percent and it would still have cash left. And even if it didn’t, it has a $500 billion line of credit at the Treasury.

Even $510.4 billion doesn’t look so big when the FDIC insures more than $4.8 trillion in deposits, said Justin Fox in Time. But Congress would “presumably be good for” losses above that—if every FDIC-insured bank failed. Bottom line: “If you don’t believe in the full faith and credit of the U.S. government and the future profitability of the U.S. banking industry, then you’ve got far bigger worries than $10.4 billion at the FDIC.”

If the FDIC’s reserves aren’t that important, said David Weidner in MarketWatch, where it’s “going for fresh cash” is worth paying attention to. Under newly relaxed rules, private equity firms will have an easier time taking over “dead banks.” And those banks that survive will pay higher premiums to the FDIC, which will trickle down to customers via lower interest rates on deposits.

The higher premiums are already cutting into bank earnings, said Kevin Drum in Mother Jones, so we get a “vicious circle”—more bank failures mean less money at the FDIC; higher fees to keep the FDIC solvent “keeps the industry underwater.” Things “don’t look so hot” for banks in the short run.