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August 27th, 2008

FDIC: So Many Bank Failures, So Little Cash



Many can remember back on July 11 when hundreds, if not thousands, of IndyMac customers lined up in front of the closed-bank doors demanding their hard earned (and federally-insured) money back. The largest bank failure of the year so far, IndyMac’s closure was just one of nine banks that had been taken over in 2008. According to ABC News, at the start of the year, 90 banks were on the FDIC’s (unpublished) watch list; now there are 117, the highest number in five years. Some experts even expect that number to grow.

In an attempt to ensure the FDIC’s insurance fund doesn’t become depleted – the federal insurer may exercise the open line of credit it maintains with the Treasury Department to bolster the fund utilized to pay back insured depositors:

“I fully expect the FDIC insurance fund to be depleted,” (Sterne Agee banking analyst Sean) Ryan added. “The FDIC is going to be one of what is going to be an increasing string of government bailouts.”

If that happens, ultimately taxpayers will be on the hook. The FDIC borrows money with a line of credit from the U.S. Treasury, which essentially is taxpayer money.

The FDIC is also considering upping its premiums to the banks it insures:

In a bid to replenish the $45.2 billion fund, (FDIC Chairman Sheila) Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.

ABC News reported yesterday that profits at the 8,500 FDIC-insured banks have dropped 86% in the second quarter alone. Despite the ugliness of the continued credit crisis, it’s a beautiful financial system that allows consumers’ hard-earned money to be protected and insured.

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One Response to “FDIC: So Many Bank Failures, So Little Cash”

  1. Susan Kishner Says: August 27th, 2008 at 2:14 pm

    Just wanted to say HI. I found your blog a few days ago on Technorati and have been reading it over the past few days.

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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