Sunday, August 30, 2009

FDIC Update: August Bank Failures 15, DIF $10 Billion (Do They Have A Plan?)

So FDIC closed three banks on Friday, bringing the August bank closure numbers to 15. "What an impressive improvement from July, when 24 banks failed!" would be the "green shooters" remark.

On Thursday FDIC finally released its Quarterly Banking Profile for the 2nd Quarter. It must have been a much-awaited event, because I couldn't get on to the FDIC's website for quite a while after the release of the report at 10:00 AM EST. All I was interested in was to find out what happened to the DIF (Depositors Insurance Fund), which was barely $13 billion or 0.27 reserve ratio at the end of March 31, 2009.

At the end of 2nd quarter that ended June 30, the FDIC's DIF, O miracle of all miracles, decreased by only $3 billion from the 1st quarter because, according to Sheila Bair, her institution managed to collect $6 billion from the member banks as additional assessment fees. Still, FDIC has only $10 billion of DIF, or 0.22 reserve ratio, and this is before the massive (so far) bank failures in July and very costly ones (Colonial Bank and Guaranty Bank, $6 billion) in August. FDIC estimates that bank failures will cost them $70 billion through 2013. But the chairwoman had this to say on Thursday's news conference:

"The FDIC was created specifically for times such as these," Sheila C. Bair said. "Our resources are strong. Your insured deposits are safe."

She also said this:

Asked about a possibility of tapping the Treasury, FDIC Chairman Sheila Bair said: "Not at this point in time. I never say 'never,' but not at this point in time, no."
Now, the congressionally mandated minimum reserve ratio for FDIC is 1.15%.

With that in mind, please take a look at this table. It shows the DIF balance and DIF-insured deposits over the 3 years, and the reserve ratio calculated from the two numbers. The reserve ratio dipped below the mandated minimum in the 2nd quarter of 2008, well before the banking crisis hit in earnest in September.

Why didn't the chairwoman act then? Why didn't Congress require that FDIC raise the assessment to the banks or force it to take the line of credit to replenish the fund? Why isn't Congress demanding that FDIC replenish the fund now? And why does Bair still refuse even now to recognize this 0.22% reserve ratio as danger beyond critical stage and refuse to use the line of credit?

She just keeps repeating the mantra "No one has lost the money with us."

Meanwhile, the emergency assessment fee imposed on smaller banks are taking the toll on their bottom line. FDIC has a line of credit of up to $500 billion with the Treasury Department, yet she refuses to draw from it. The only way to raise additional funds for DIF then is to assess another emergency fee, that will further penalize small banks disproportionately.

If I become more cynical than I already am, I would say Ms. Bair is doing it on purpose - to kill off as many small banks as possible to feed the big banks, even the foreign ones, as cheaply as possible. I can easily think of worse possibilities but those are not the good ones to contemplate right before going to bed...

OK, I found more details about DIF and the congressionally mandated minimum reserve ratio. I couldn't believe my eyes.. This is from March 2009 Journal of Accountancy Highlights:

"With the DIF reserve ratio at 1.01% at the start of the third quarter, the FDIC is required by the Federal Deposit Insurance Reform Act of 2005 to establish a restoration plan to raise the ratio to 1.15% no later than five years after establishing the plan. The plan to restore the ratio includes a combination of uniform higher assessment rates and other risk-based adjustments that place a greater burden of increased assessments on riskier institutions."

All the law requires is that FDIC devise a plan, and raise the ratio to 1.15% within 5 years after they devise the plan. So, by law, the chairwoman can simply sit on her hands doing nothing as long as she has a plan. And she doesn't even seem to have a plan, but she assures us "No one has lost money with us."

This is getting surreal.


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