Banks to Bail Out the Government?

The Federal Deposit Insurance Corporation, the government agency that insures consumer deposits at banks, declared yesterday that its reserves are way down and that the fund it uses to protect bank deposits is now in the red. The solution: have banks prepay their fees for the next four years, including the current one, before the end of 2009.

The FDIC’s money problems are a result of the many bank failures over the past two years. Back in June 2008 the agency had $45.2 billion in its fund, but after 95 bank failures in the first half of 2009 alone the fund is now down to $10.4 billion as of June. Hundreds more failures are predicted in the coming years.

The fees to be collected by the banks are the fund’s normal source of income, but they are just being requested to be paid ahead of time. The total amount the FDIC hopes to collect is $45 billion.

“Our analysis suggests the industry can step up, so that’s what we are asking them to do,” said FDIC Chief Sheila Bair.

Apparently the banks are now in better shape than the government agency designed to protect their clients’ assets.
The FDIC has explored other options to fix its budget crisis, including borrowing money from the Treasury Department, although Bair was against it.

“I do think that the American people would prefer to see an end to policies that looked to the federal balance sheet as the remedy to every problem,” she said. “In choosing this path, it should be clear to the public that the industry will not simply tap the shoulder of the increasingly weary taxpayer.”

Some in the banking industry however, wished the Treasury option would have been more seriously considered.

“The industry agrees that this is a better alternative to what clearly would have been several special assessments, but this prepayment will decrease the ability to lend,” said Edward L. Yingling, president of the American Bankers Association. “This prepayment will be a short-term asset, like an investment, but particularly for banks with a high percentage of loans, the prepayment will mean they have less money to lend as it will be tied up in this asset.”

That is a major concern at this point – even if banks can afford to prepay their fees, it could lead to a much tighter lending market, especially for small businesses. And things have already been tough for that sector for a while!