Posted by: Theo Francis on August 27
The headlines look scary: The fund insuring U.S. bank deposits has shrunk to $10.4 billion from $17 billion in December and $52 billion in late 2007. The number of banks on the government’s problem list jumped to 416 from 305 last year. Forty-five banks have failed so far this year, more than in the last six years combined.
The banking industry is hurting, make no mistake. But before you stash your savings in your mattress, take a closer look at the numbers out today from the Federal Deposit Insurance Corp.
They’re not rosy, but they might not be quite as scary as they seem, even if they signal more pain for the banks themselves.
Let's start with that $10.4 billion, a low-water mark not seen in the FDIC's deposit insurance fund since about 1993.
You get it by taking the FDIC's assets -- $21.6 billion in cash or equivalents and another $43.2 billion in other assets, largely accumulated by taking over failed banks -- and subtracting $22.4 billion in liabilities and another $32 billion for a "contingent loss reserve for expected failures." That leaves $10.4 billion left over.
But here's the good news: That contingent loss reserve is what the FDIC expects to shell out (over time) for bank failures going forward, taking into account worsening conditions. In other words, even after projecting the pain from the financial crisis, the FDIC still expects the deposit-insurance fund to be $10.4 billion in the black.
Granted, the FDIC's projections could be wrong, and $10.4 billion doesn't look like much measured against the more than $4.8 billion in deposits guaranteed by the agency. But even if the FDIC were off by 50%, and bank failures ultimately cost it $48 billion instead of $36 billion, the deposit fund would be only $1.6 billion in the hole.
That deficit wouldn't materialize all at once, but even if it did, the FDIC could meet close the deficit by drawing on a $100 billion line of credit from the Treasury for just this purpose -- and could even tap into another $400 billion with the approval of the Treasury and Federal Reserve.
The loan would come from the government, but not out of taxpayers pockets. Instead, the FDIC would assess fees on surviving banks. Granted, tose fees would largely be passed on to you and me, but only indirectly, in the form of lower interest on our deposits. It's probably still more than you'll get from your mattress.
From a bank's perspective, and from a bank investor's, the picture is a little bleaker, of course. Generally the FDIC tries to keep its fund at 1.25% of insured deposits, and while it has proposed jiggering the formula to put more of the burden on bigger banks, getting back to that level from less than 0.25% will take some cash. Once again, that cash comes from surviving banks -- even if the FDIC doesn't blow through its remaining cushion.
To get back to normal, analysts suggest the FDIC's assessment could rise to 30 or 40 basis points (0.3% to 0.4%) of deposits. It doesn't sound like much, but it's high historically. For many banks it could amount to maybe 10% of revenues from deposits, or a quarter to a third of their margins. They can only cut the interest rates they pay us so much to absorb that (you're lucky to get close to 1.5% on savings these days), meaning investors could take a hit.
Then again, the surviving banks would also divvy up our banking business going forward, so it wouldn't be a complete loss.
The headlines look scary: The fund insuring U.S. bank deposits has shrunk to $10.4 billion from $17 billion in December and $52 billion in late 2007. The number of banks on the government’s problem list jumped to 416 from 305 last year. Forty-five banks have failed so far this year, more than in the last six years combined.
The banking industry is hurting, make no mistake. But before you stash your savings in your mattress, take a closer look at the numbers out today from the Federal Deposit Insurance Corp.
They’re not rosy, but they might not be quite as scary as they seem, even if they signal more pain for the banks themselves.
Let's start with that $10.4 billion, a low-water mark not seen in the FDIC's deposit insurance fund since about 1993.
You get it by taking the FDIC's assets -- $21.6 billion in cash or equivalents and another $43.2 billion in other assets, largely accumulated by taking over failed banks -- and subtracting $22.4 billion in liabilities and another $32 billion for a "contingent loss reserve for expected failures." That leaves $10.4 billion left over.
But here's the good news: That contingent loss reserve is what the FDIC expects to shell out (over time) for bank failures going forward, taking into account worsening conditions. In other words, even after projecting the pain from the financial crisis, the FDIC still expects the deposit-insurance fund to be $10.4 billion in the black.
Granted, the FDIC's projections could be wrong, and $10.4 billion doesn't look like much measured against the more than $4.8 billion in deposits guaranteed by the agency. But even if the FDIC were off by 50%, and bank failures ultimately cost it $48 billion instead of $36 billion, the deposit fund would be only $1.6 billion in the hole.
That deficit wouldn't materialize all at once, but even if it did, the FDIC could meet close the deficit by drawing on a $100 billion line of credit from the Treasury for just this purpose -- and could even tap into another $400 billion with the approval of the Treasury and Federal Reserve.
The loan would come from the government, but not out of taxpayers pockets. Instead, the FDIC would assess fees on surviving banks. Granted, tose fees would largely be passed on to you and me, but only indirectly, in the form of lower interest on our deposits. It's probably still more than you'll get from your mattress.
From a bank's perspective, and from a bank investor's, the picture is a little bleaker, of course. Generally the FDIC tries to keep its fund at 1.25% of insured deposits, and while it has proposed jiggering the formula to put more of the burden on bigger banks, getting back to that level from less than 0.25% will take some cash. Once again, that cash comes from surviving banks -- even if the FDIC doesn't blow through its remaining cushion.
To get back to normal, analysts suggest the FDIC's assessment could rise to 30 or 40 basis points (0.3% to 0.4%) of deposits. It doesn't sound like much, but it's high historically. For many banks it could amount to maybe 10% of revenues from deposits, or a quarter to a third of their margins. They can only cut the interest rates they pay us so much to absorb that (you're lucky to get close to 1.5% on savings these days), meaning investors could take a hit.
Then again, the surviving banks would also divvy up our banking business going forward, so it wouldn't be a complete loss.
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