FDIC May Need to Tap Treasury for Bank Failures

The FDIC insurance fund, strained by eleven bank failures this year already, is at its lowest level in over five years. Although FDIC Chairman Sheila Bair has been quick to point out that over 98% of the nation’s banks are categorized as adequately capitalized by regulators, the failure of a major bank could force the FDIC to borrow funds from the US Treasury to meet obligations. The insurance fund reported to currently hold $45 billion would be overwhelmed by the failure of a bank like Washington Mutual Bank which is reported to hold assets of over $300 billion. While the US Treasury would make up the difference, ultimately the US taxpayer would pay the costs for the bad lending decisions of banks. In addition, banks are expected to begin paying higher premiums to the FDIC almost immediately, which is a cost that ultimately will be passed on to banking customers in the form of higher service fees, lower deposit rates, or higher loan rates.

So will the bank failure continue in 2008? The FDIC released a summary of problem banks as of June 30, 2008 which listed 117 problem institutions with $78.3 billion of dollars in deposits. It would be hard to imagine that those 1117 institutions are in any better shape than they were at the end of the second quarter. Most banking experts are predicting another 5 to 10 failures this year.