John Bovenzi COO of FDIC Says Bank Failure Costs to Top $40 Billion

John Bovenzi, the Chief Operating Officer of the FDIC said in a committee hearing to the US House that the cost to the FDIC to ensure bank failures will likely cost more than the original prediction of $40 billion over the next four years.  In this testimony, he said:

Last fall, as part of its restoration plan and associated proposed rulemaking on assessments, the FDIC estimated a range of possible failure cost estimates over the 2008-2013 period, with $40 billion considered the most likely outcome. Since that time, another quarter of financial data on banking industry performance has become available. These data, combined with ample evidence of deteriorating economic and industry conditions, now suggest that the range of losses to the insurance fund (and the most likely outcomes) over the next few years will probably be higher. "

As a result, the FDIC has asked the Treasury to increase its line of credit from $30 billion to $100 billion.

He also discusses whether the temporary FDIC insurance coverage limit of $250,000 per account should be made permanent.  He says:

Permanently increasing the level of insurance coverage also will have the effect of immediately reducing the reserve ratio of the DIF. Because the DIF reserve ratio is currently below the statutorily mandated range for the reserve ratio, the FDIC is required to implement a restoration plan to return the reserve ratio of the DIF to at least 1.15 percent of estimated insured deposits within five years. The FDIC Board has instituted premium increases necessary to implement the restoration plan. Because of the immediate dilutive effect on the DIF of permanently increasing coverage to $250,000, extending the time period for restoring the DIF reserve ratio to within the statutorily mandated range would be appropriate. "

In plain English, permanently increasing the limit would require increased funding into the Deposit Insurance Fund (DIF).  This funding comes from banks, who pay into the DIF on an annual basis.  So, raising the limit will increase the burden on the very banks that the FDIC expect to fail in greater numbers over the next couple of years.

What does all of this mean?  It means that more taxpayer money is going to have to go to backstop the DIF and to support the FDIC insurance program.  In every way, the stability of the banking system is now totally dependent on public support.  If bankers are complaining about nationalization, it's unfortunately already too late. 

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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