The Federal Deposit Insurance Corporation — the federal agency that insures bank deposits up to $250,000 — is in financial straits because it failed to collect insurance premiums from most of the banks it insures for 10 years, reports The Boston Globe.
In 2001, Sheila Bair, then a Treasury official and now FDIC head, began asking Congress to grant authority for her agency to collect the premiums as a hedge against financial crisis.
Until 2006, congressional representatives declined because they believed the FDIC was so well-capitalized — and that bank failures were so infrequent — that there was no need to collect the premiums.
"That is five years of very healthy good times in banking that could have been used to build up the reserve," Bair says now.
"That is how we find ourselves where we are today.”
The FDIC has proposed collecting $27 billion in new premiums from banks this year and has asked Congress for the temporary authority to borrow as much as $500 billion from the U.S. Treasury to avoid having its funds wiped out by future bank failures in the coming months.
Bair earlier warned that the agency could literally go bust.
Due to "rapidly deteriorating economic conditions" a large number of bank failures are possible, Bair told bank in a letter.
If that happens, according to Bair, "...current projections indicate that the fund balance will approach zero or even become negative.”
As a hedge against that potential, the FDIC recently imposed one-time "emergency" assessment fees on banks. The infusion of new money will replenish the shrinking cash reserve used to reimburse depositors for losses up to $250,000 in the event of a bank failure.
Twenty-five banks failed in 2008, reducing FDIC funds by $33.5 billion. Another 16 banks have failed since Jan. 1, 2009.
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