The FDIC Is in Trouble


As we all know, the Federal Deposit Insurance Corporation (FDIC) guarantees depositors that they’ll get their money back if a bank fails, at least up to a certain amount. To fund its operations, the FDIC collects small fees from the banks that are held in reserve for the purpose of taking over troubled banks and paying off depositors.

Since the Great Depression, a period marked by widespread runs on banks, the FDIC has done a good job of fulfilling its mandate. So how are they doing in this crisis?

In a nutshell, they are in trouble.

The FDIC insures 8,246 institutions, with $13.5 trillion in assets. Not all of them are going bankrupt, of course. Yet as of late July, a disturbing 64 banks had gone belly up this year – the most since 1992 – costing the FDIC $12.5 billion. At the end of Q1, the agency was already asking for emergency funding.

And worse, much worse, is likely yet to come. The following chart shows the total assets on the books of the FDIC’s list of 305 troubled banks. The list doesn’t include the biggest banks that are considered too big to fail, as they are being separately supported with bailouts. By contrast, if the banks on this list fail, the FDIC is on the hook to have to step in and take them over and, of course, make depositors whole.

Other measures of how serious the losses at banks are becoming can be seen in the chart below, which shows charge-offs and non-current loans at all banks. You can see that the Net Charge-offs remain stubbornly high, with banks charging off almost $40 billion in bad loans in the last two quarters alone. And the number of non-current loans – loans where payments are not being kept up – is soaring.

Together, these measures indicate the potential for more big failures and more big bailouts coming down the pike.

Into the battle against bank insolvency the Fed brings a level of reserves that can best be described as paper-thin. From almost $60 billion last fall, the FDIC’s reserves have been drawn down to only about $13 billion today, a 16-year low. A quick look at the FDIC’s own data shows us how inadequate those reserves are compared to the deposits they are now insuring.

The chart below says it all:

As you can see, the Federal Deposit Insurance Corporation currently covers each dollar on deposit with a trivial 2/10ths of a penny.

And even that understates the seriousness of the situation: the $4.8 trillion in deposits the FDIC is providing coverage on doesn’t include the expansion that now extends insurance coverage from $100,000 to $250,000 for normal bank accounts. That likely brings the exposure of the FDIC closer to $6 trillion. But that’s pretty inconsequential at this point: using any reasonable accounting method, the FDIC is already bankrupt and will require hundreds of billions of dollars in government bailouts just to keep the doors open.

So, given the dire shape of its finances, what measures is the FDIC taking, you know, to batten down the hatches and all that?

For starters, they are expanding their mandate by guaranteeing bank loans – $350 billion and counting at this point. And the government has tapped the FDIC to play a pivotal role in guaranteeing the loans issued to buy toxic waste through the government’s highly problematic and fraud-prone new Private Public Investment Partnership (PPIP). The FDIC’s commitment to the PPIP is and may become limited based on its resources.

It is hard to draw any other conclusion but that hundreds of billions in new funding will be required to keep the FDIC operating. Given the catastrophic consequences of the FDIC failing, starting with a bank run of biblical proportions, there’s no question it will get whatever funding it needs. By loading the new loan guarantee responsibilities and the PPIP onto the FDIC’s back, the administration will go back to Congress and ask for the next large bailout.

Of course, in the end, all of this falls on the taxpayer, either directly in the form of more taxes or indirectly via the destruction of the dollar’s purchasing power. Another bale of straw on the camel’s back, and another reason to be concerned about holding paper dollars for the long term.


Bud Conrad
for The Daily Reckoning Australia

Bud Conrad
Mr. Conrad holds a Bachelor of Engineering degree from Yale and an MBA from Harvard. He has held positions with IBM, CDC, Amdahl, and Tandem. Currently, he serves as a local board member of the National Association of Business Economics and teaches graduate courses in investing at Golden Gate University. Bud Conrad, a futures investor for 25 years and a full-time investor for a decade, is also a regular lecturer for American Association of Individual Investors. In addition he produces original analysis for Casey Research, including unique charts and research on the economy and investment markets.
Bud Conrad

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  1. This is especially troubling to me, because I work for a supplier of banks. The other day I read that 500 banks are could fail in the next year and another 1000 the year after.

    In two years, we could see the number of banks drop from 8000 to 6000. That is a lot of lost customers for bank suppliers and I’m sure my company will have to reduce it’s staff to manage the losses. Time to consider plan B.

  2. I will try to wrap a few thoughts I have had with recent events. I believe the most upfront regulators have been the Brits even though they are in one of the most perilous positions outside the basket case Baltics. So when they have just announced another pump up of the printing press I believe they are responding to the reality of their situation rather than hiding from it. They have a track record of allowing real estate to be marked down to market (look at the late 80’s and the current figures and compare them to Australia’s denial efforts in both episodes) and this is at odds with their fiscal doings but like Darling’s comments on banking capital standards there is some responsibility about at some levels which threatens the bankers inflationary party.

    Do I think the Brit action it is the right thing to do … no. But it would be if you believe that a shattering of confidence in a services economy is worse than bringing on Weimar era inflation and beggar thy neighbour currency events. But I had done some reading on the latter while living in Germany and had access to some fine people who had lived either as children or were able to relate their parents stories of that time in detail. through studiedrinting press yet again I believe they are responding to find I am most in synch with Alistair Darling and the Swiss of any regulators worldwide. In more contemporary terms I also have some Brasilian friends with their stories of the paypackets being immediately dispersed for staple shopping and the empty shops for the remainder of the month and I know that hyper inflation diverts productive capital to unproductive activity and that it in turn feeds the cycle and the currency collapse which cannot be ignored in any significant world currency by its neighbours.

    So Bill Bonner and maybe even Dan might get after the Brits today. But I believe that underlying the Brit decision is the fact that they recognise that stimulus money is not hitting the real economy. I believe that stimulus money is going to straight to the market making activities of the merchant bankers and that the money is being dispersed offshore from both the US and UK merchant banking hubs. The trading book returns of the US/UK banks is there to be reviewed. Like Denninger says, and I don’t agree with him all the time, but when you look at the daily bet-to-win ration of Goldman’s that he quotes from their SEC filings and of the trading profits ripped out across the sector, or the ratio of index trades to market volume and that curve, and what macro views of the source and application of banking funds that are available, and what is happening in the market with “risk currencies” you can reasonably reach the conclusion that there is a return of the funny money event and that the leverage is being applied in foreign markets and that the domestic lending and investment (other than to parties like hedge funds that invest foreign on the second bounce) is lagging and in the US especially that it is only foot dragging on the marking to market of underwater real estate (both commercial and residential) and the increase of “can’t hold out anymore” sales of higher value of non sub prime houses and of overstretched ARM houses, and combined with Fed Reserve balance sheet securities not being marked to market that is temporarily holding back the dyke of domestic asset deflation in the US market.

    When the Chinese stockpile event is removed and the US domestic economy is remeasured with predestined unfolding events then commodities will go for the ride as well and investors that have jumped onto Goldman’s train will get taken down and their new TARP origin funny money will have to bolt straight back to a USD redemption because those takign risks now still have those underlying hidden mortally wounded balance sheet and so the velocity is increased.

    So in my opinion Summers has been at it again but this time instead of taking more than 10 years for the reckoning it will unwind pronto. Subsequently, US foreign policy is the biggest fear for us all now, watch the sealanes …. and for operation names like “deny fuel for terror”.

  3. An additional planet aligning against the fortunes of the recent US rally is that people are discovering how (and to what extent) the Federal Reserve is manipulating markets at the moment: I think the current market rally (suckers’ or whatever name it ends up getting) is very close to its end.

  4. The ratio of projected FDIC loss to bank assets appears to have been rising on recent closures, potentially indicating that the FDIC is closing only the most troubled banks. In some cases the projected loss appears to be several times the amount of capital which the bank should have had, indicating that the bank was deeply insolvent well before the takeover.

    Our sense from the field (real estate) is that rather than mark to market, the prevailing attitude in the relationship between the banks and fdic is don’t ask- don’t tell.

    Steve Dietrich
    June 7, 2010

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