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March 12th, 2009

FDIC Needs $500B in Preparation for More Failures



As the Federal Deposit Insurance Corporation (FDIC) prepares for additional bank failures, chairwoman Sheila Bair has asked Congress for more money. Bair says the FDIC needs $500 billion because the corporation hadn’t collected insurance premiums for 10 years. The blame doesn’t exactly fall entirely on the shoulders of the FDIC:

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.

Talk About Increases

The FDIC has proposed collecting up to $27 billion in insurance premiums this year from the banks they insure, up from only $3 billion last year. Banks warn that now isn’t the best time to put an additional strain on their capital. If imposed the higher premiums would likely trickle down to consumers which could increase their costs.

The FDIC’s request for $500 billion far exceeds their current limit of $30 billion they hold with the Treasury. While 25 banks failed in 2008, the FDIC has taken over 17 so far this year (and it’s only March).

Obeying the Warning Signs

As a Treasury official, Bair said she testified in 2001 that the FDIC should be collecting insurance premiums. Bair claims that five good banking years were wasted which could have been spent preparing the fund. Yet not all experts are blaming lawmakers:

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” There were relatively few bank failures and no projection of the current economic collapse, he said.

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3 Responses to “FDIC Needs $500B in Preparation for More Failures”

  1. William Says: March 14th, 2009 at 12:00 pm

    This is just another of the many wrongs committed by our government and regulators during the good boom times. Now that the economy is bust, little by little, some new revelation emerges. This one being that FDIC did not collect insurance premiums from their member banks. This scheme began in 1996, with the big banks being the most likely proponents. Sadly, the FDIC and the Congress at the time bought into the idea. Is there any accountability for anything anymore? Can my neighbors and myself stop paying home insurance if we haven’t had a disaster for quite some time? After all, if the insurance company’s investments are doing well, that return on investment should be used to pay our premiums.

  2. Tim Manni Says: March 16th, 2009 at 2:07 pm


    Thanks for your comment. You presented an interesting analogy: “Can my neighbors and myself stop paying home insurance if we haven’t had a disaster for quite some time?” We certainly aren’t allowed to do such a thing, why should they? I think that’s pretty similar. It’s easy to let your guard down during the good times, but now we’re unfortunately seeing how much it has hurt us.

    Thanks again,

  3. FDIC's Bair: Some Banks Could Be Beyond Help Says: March 24th, 2009 at 4:03 pm

    [...] FDIC Needs $500B in Preparation for More Failures (hsh.com) [...]

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