FDIC Is Short $100 Billion But Long On Solutions

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The FDIC has been discussing the idea of banks prepaying their risk-based assessments for the last quarter of this year and all of 2010, 2011, and 2012. The move appears desperate because it is. The agency said in a memo today that it was out of money. The “staff estimates that both the Fund balance and the reserve ratio as of September 30, 2009, will be negative.”

It would probably shock most people to find out that the part of the government charged with insuring their bank deposits has no money to do so. It may calm them to know that the Treasury can supply the capital, but that increases the amount of money that the government will have to borrow and increases it substantially, because the FDIC says that it will be $100 billion short over the next three years. The analysis provided by the agency says, “Staff projects that, over the period 2009 through 2013, the Fund could incur approximately $100 billion in failure costs. Staff projects that most of these costs will occur in 2009 and 2010. Approximately $25 billion of the $100 billion amount has already been incurred in failure costs so far in 2009.”

The FDIC boil wants to take money from America’s banks now to fund trouble that will occur primarily over the next year across the entire banking sector. The industry will in effect loan itself money at no interest to allow firms that fail to make sure that their depositors are kept whole.

The program makes a great deal of sense if bank failures drop sharply after the end of next year. The program may be a strain on the finances of many banks that do not have readily available the capital to pre-pay their “dues”, but in the name of underwriting the safety of the entire system, that is a small price to pay, if that is the end to it.

It does not matter if analysts call what may happen to the economy over the next two years a double dip recession, a period of prolonged stagnation, or a painfully slow recovery. Among all these cases there is a good chance the rate at which banks fail may not slow substantially at the end of next year. There is nothing wrong with hoping for the best, but building the FDIC’s budget on the assumption is nearly reckless.

The federal government is running low enough on places to find money to support rapidly growing red ink that it is moving toward borrowing from the future to fund the present based on the theory that the future will be so bright that it will not matter. That line of reasoning will work until it doesn’t, and that probably will not take very long.

Douglas A. McIntyre