Bank Failures to Drain $19 Billion From FDIC Through 2015

The Federal Deposit Insurance Corporation says that its FDIC fund covering losses from bank failures will lose another $19 billion from 2011 through 2015.

But that’s good news, it says -- even though the deposit fund that is used to backstop an estimated $6.5 trillion in your deposit money has a very low balance, $3.9 billion. In its update of its reserve ratio projections, the FDIC said the $19 billion figure is a decline from the estimated $23 billion it says was needed to cover deposit losses from bank collapses last year.

The FDIC estimate can be used as a gauge for the rate of bank failures. So far this year, 76 FDIC-insured banks failed, versus 157 last year and 140 in 2009. "At this point in time last year, 129 banks had failed," says an FDIC spokesman.

The deposit insurance fund fell into the red in September 2009, the FDIC spokesman says, after a slew of banks collapsed from the 2008 financial crisis. The fund stood at $45 billion, or 1.2% of insured deposits, in the second quarter of 2008, says the FDIC. The fund then stayed in the red for seven quarters. It only flipped positive on June 30 of this year.

The fund “became positive in the second quarter of 2011, standing at $3.9 billion at June 30,” the FDIC says, noting its balance “has increased for six quarters in a row.” That’s a swing of “almost $25 billion from its negative $20.9 billion low point at the end of 2009,” the FDIC says. The FDIC can access a line of credit with the U.S. Treasury if necessary.

FDIC acting chairman Martin J. Gruenberg in a statement: "The assessment that the insurance fund remains on the path to recovery and on track to meet the goals established by Congress is welcome news," adding, "As we seek to stay on track, it's important to always be mindful of the challenges we face and ongoing risks to the insurance fund."

However, the FDIC’s reserve ratio still needs bolstering, it says in a statement. The ratio is the amount in the deposit insurance fund divided by insured deposits in the U.S. banking system.

“While these loss projections are subject to considerable uncertainty, under these projections and current assessment rates, the fund should reach 1.15% of estimated insured deposits in 2018,” the FDIC says.

The Dodd-Frank bill signed into law last year says the fund’s reserve ratio must reach 1.35% by September 30, 2020. To get there, the FDIC says a “future rulemaking will implement the requirement in Dodd-Frank that the FDIC offset the effect of increasing the reserve ratio from 1.15% to 1.35 % on institutions with assets of less than $10 billion.”

That’s got a big banking lobby group concerned.

"The FDIC's update on the recapitalization of the deposit insurance fund reaffirms the fact that the banking industry is rapidly returning to health and the losses once expected were overstated,” says James Chessen, chief economist of the American Bankers Association in a statement. “The FDIC had set aside $17.7 billion for possible bank failures losses at the start of 2011, twice what the actual losses are likely to be this year.”

Chessen adds: "The banking industry, not taxpayers, is solely responsible for the financial health of the FDIC. Banks are paying $13.5 billion in yearly premiums to the FDIC, which is far in excess of the yearly costs expected by the FDIC over the next several years. The insurance fund is rebuilding faster than the FDIC had projected at the end of 2009 when the industry paid $46 billion in pre-paid assessments to ensure the FDIC would have adequate cash to handle any contingency.”