FDIC May Need $150 Billion to Pay for Rising Bank Failures

FDIC May Need $150 Billion to Pay for Rising Bank Failures

As the economic environment looks worse and worse for banks, many believe that the FDIC will need more money to continue insuring the bank deposits of failed institutions.

As the economic environment looks worse and worse for banks, many believe that the FDIC will need more money to continue insuring the bank deposits of failed institutions.  David Evans from Bloomberg has a very lengthy and detailed article looking at the issue.  He writes:

"Americans have gotten used to the idea that bank failures were as rare as a category five hurricane. No banks went bust in 2005 or 2006. Seven collapsed in 2007 as the credit crisis began to exact a toll. So far in 2008, 12 more, with total assets of $42 billion, have fallen -- that's the worst wave of bank failures since 1992.

IndyMac, which had $32 billion in assets when it went into receivership, is the most expensive bank failure the FDIC has ever covered. And that record may not stand for long.

By the end of 2009, about 100 U.S. banks with collective assets of more than $800 billion will fail, predicts Christopher Whalen, managing director of Institutional Risk Analytics, a Torrance, California-based firm that sells its analysis of FDIC data to investors.

``It's not going to be Armageddon,'' says Mark Vaughan, an economist and assistant vice president for banking supervision and regulation at the Federal Reserve Bank of Richmond, Virginia. ``But it's going to be bad.''

In September alone, two small banks failed.  On September 19, Ameribank with $102 milion in deposits was closed by the FDIC.  Its deposits and some of its assets were sold to two other banks.  On September 5, 2008, Silver State Bank, Henderson, NV was closed by the Nevada Financial Institutions Division and the Federal Deposit Insurance Corporation (FDIC) was named Receiver

Many analysts expect many more small bank failures as well as some larger one.

Should you be concerned?  It's highly unlikely the government will allow the FDIC to go insolvent.  But if more bank failures happen, as they're bound to do, look for the FDIC to receive more cash.  Of course, that's just more money out of your pocket.

"It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue."

How can you help protect yourself?

1. Don't just rely on FDIC insurance.  Look at a bank's Bauer rating (meaure of its safety and soundness) to determine its health.  BestCashCow provides these ratings on savings accounts and certificates of deposits.

2. Look at a bank's stock price.  The stock price is a forward looking measure of what the market thinks of a bank's stability and future prospects.

3. Make sure your money is FDIC insured.  Limits vary depending on whether you have a joint account and POD (Payable Upon Death) beneficiaries.  In many cases a joint account can receive $100,000 in coverage per person and an additional $100,000 in coverage for each POD beneificiary. 

Sol Nasisi
Sol Nasisi: Sol Nasisi is the co-founder and a past president of BestCashCow, an online resource for comprehensive bank rate information. In this capacity, he closely followed rate trends for all savings-related and loan products and the impact of rate fluctuations on the economy. He specifically focused on how rates impact consumers' ability to borrow and save. He also has authored a wee

Your code to embed this article on your website* :

*You are allowed to change only styles on the code of this iframe.

Comments

Add your Comment