FDIC On The Cost Of Bank Failures

Highlighted companies include Bank of America (BAC) and Citigroup (C).

FDIC’s Estimate for the Cost of Bank Failures - Get the Alka-Seltzer

For the first half this decade, bank failures were few and relatively far between. For 2008 there were 25 bank failures and for January 2009 there were 6, 3 of which occurred last week. This has us coining the phrase, “If its Friday, there must be another bank failure to be announced after 5 PM.”

We not trying to be crass — it’s just the time in the cycle we currently live in (pressures of tumbling home prices, rising mortgage foreclosures, and tight credit requirements). To put this in context, As of September 30, 2008, of the approximately 8,500 federally insured banks and thrifts, the Federal Deposit Insurance Corp. (FDIC) had 171 on its confidential list of troubled institutions (nearly 50 percent jump from 2Q08, the highest tally since late 1995).

During the fall of 2008, the FDIC originally estimates called for approximately $40 billion in losses to the insurance fund (which included $8.9 billion in losses attributed to last July’s failure of the major thrift, IndyMac Bank). In October 2008, as part of the government’s financial rescue plan and a means to thaw the frozen bank-to-bank lending, the FDIC provided temporary insurance for loans between banks, guaranteeing the new debt in the event of payment default by the borrowing bank. To that end, the FDIC established a program to guarantee up to $1.4 trillion in U.S. banks’ debt for more than 3 years.

Since the original estimate, there has been another 3 months of data on banking industry performance (or lack of performance) and more evidence of deteriorating economic conditions (combined these items equate to additional losses on the horizon). To that end, the FDIC recently stated that its originally estimate for losses through 2013 was probably a tad light.

Moreover, the FDIC now suggests that its line of credit with the Treasury Department should be tripled to $100 billion from $30 billion currently, even though it has never drawn upon this credit line.

If the FDIC were to tap the taxpayer funds, it is required by law to repay any money borrowed through fees levied on the banking industry. So far, the FDIC has raised insurance premiums paid by banks and thrifts to replenish its fund, which now stands at around $34.6 billion (which happens to be below the minimum target level set by Congress and the lowest level since 2003).

Given that the current fund level is anemic and the government has been considering several programs unrealistic programs (to include a government-run “bad bank” scenario (to buy up troubled assets clogging banks’ balance sheets), the potential for additional guarantees against losses like those granted to BankAmerica (BAC) and Citigroup (C) would be need, and with a strong likelihood for more capital injections to the system, we have one question: “Where’s the money coming from?”

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