FDIC to Require Banks to Pay for Three Years of Insurance—by the End of This Year!

This is just insane!  Unless the FDIC gives exceptions, banks which are already financially unstable will be forced into bankruptcy!  Think about it this way:  You are eking out a living for yourself and have bought a nice car that you are still making payments on.  Basically, you are living paycheck to paycheck.  Your bank calls you up one day and says, “Oh, by the way, we need you to pay three years worth of car insurance within the next two months, or else we will repossess your car.”  What the heck do you do?  Pay for three years worth of insurance, or give up the car?

Now, I’m no accountant, and I won’t even begin to pretend that I understand the inner machinations of the FDIC, so I may be way off base here.  In fact, if I have this all wrong, please feel free to correct me.  But, from what I can gather, the FDIC  charges banks a percentage of their assets which then gets thrown into a large pool from which the FDIC uses to pay customers of banks which have gone out of business.  FYI—just in case you find yourself as a contestant on Jeopardy or something—the percentages that the FDIC charges the banks are multiplied by 100 and called “basis points.”

So, let’s say that you have a bank that normally pays the FDIC at a rate of 0.015 percent of its total assets (or 1.5 basis points (100 x 0.015 = 1.5)).   Three years worth of insurance payments would put that at 0.045 percent (4.5 basis points).  Now, that doesn’t sound like much until you consider that these are “assets” and not cash-on-hand assessments.  Remember, a bank doesn’t just stick all of its money (assets) in the vault and lock the door.  It keeps most of its money tied up in loans and investments.  These are called “earning assets” because they “earn” money for the bank.

So, if your small town bank has total assets worth 5 million dollars, yet only netted $200,000 this quarter, your bank would be $25,000 in the hole after having paid the FDIC’s extortion money.  (5 million dollars in assets x 0.045 percent = 225,000 dollars to the FDIC).

Therefore, it is just outright crazy to ask banks, which are already experiencing financial problems, to pay three years worth of FDIC insurance in the next two months!  Of course, the big boy banks are just loving all of this.  Why?  Because it will probably knock out some of the smaller competitors; then, the big boy banks can rush in like vultures and buy the failed banks for pennies on the dollar.

Banks to prepay FDIC for failures
Agency to collect 3 years of insurance premiums in advance

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, November 13, 2009

The Federal Deposit Insurance Corp. will collect $45 billion from the banking industry to cover the rising cost of bank failures, an unprecedented assessment that reflects the agency’s projections that the current round of failures will not peak until next year.

The FDIC’s board voted Thursday to require banks to pay at the end of this year the amount they would owe the FDIC over the next three years. The agency collects insurance premiums from all banks, which it uses to reimburse depositors in failed banks.

In the past two years, the FDIC has seized 145 banks, compared with only three in 2007. The casualties include four of the 10 largest failed banks in U.S. history. The agency projects that the cost of all failures resulting from the current crisis will reach $100 billion.

The FDIC has already spent or set aside the money to cover more than half of those costs, but for the first time since the early 1990s, the agency said the regular premium payments wouldn’t be enough to cover the costs looming on the horizon.

Depositors don’t run any risk, as the FDIC can always turn to the federal government for emergency funding. But FDIC officials have said that they prefer for the industry to pay the costs of the failures upfront to avoid the perception that taxpayers are funding another bailout.

FDIC Chairman Sheila C. Bair thanked the industry for its support of that approach on Thursday.

“I’m pleased but not surprised by the industry’s willingness to step up to the task,” Bair said.

The money that the FDIC is collecting from banks legally is considered a prepayment of future premiums. That technicality is intended to avoid a hit to the industry’s lending capacity.

Payments to the FDIC generally are deducted from banks’ capital, the reserves they are required to hold against unexpected losses. Because banks make loans in proportion to their capital, the FDIC premiums reduce lending capacity. But in this case, banks are not required to report a reduction in capital until the quarter in which the premiums were originally due.

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12 Comments on “FDIC to Require Banks to Pay for Three Years of Insurance—by the End of This Year!”

  1. yonason Says:

    Yeah, and the govt., will spend it, and no one will ever see it anyway. I wonder how many banks will fail as a result. And, why 3x? Why not just 1x plus a service fee. 3x is the kind of thing you would expect from the mob, . . . oh, wait, nevermind.

    They are destroying the economy, for sure. Many businesses are already bailing out.
    “Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing,” Farr said today in Chicago at a Baird Industrial Outlook conference. “Cap and trade, medical reform, labor rules.”

  2. az_conservative Says:

    And the money for the FDIC deposit insurance fund is part of the General fund, so you’re right, yonason: Congress will spend it, just like they’ve spent the rest of the DIF and the SS trust.

    What we have here, folks, is the largest theft in history, happening right before our eyes. Can’t you feel their grimy fingers in your pockets?

  3. Leatherneck Says:

    Like Ronin said not to long ago. Do not buy a new car anymore, take your old car in to have a new engine, or transmission put in. Helping regular folks with your money.

    Me, I have 5 more payments on my Jeep. Then, I will get a lift kit, winch, new paint, soft cover, and a good CD stereo system. Don’t forget that new USMC sticker that goes on the back left bumper.


  4. CavMom Says:

    Forcing all the banks to close makes it much easier to obtain their world banking goal.

  5. ciccio Says:

    I have been raving and ranting about this for months, I am pleased to see that other people are waking up to the facts. Fact 1: So far for November 9 banks have been closed. Fact 3: 20 for October. Fact 3: 127 for 2009.
    Fact 4: 47 for 2000-2008. Fact 5: There are another 505 banks in critical condition. Fact 6: Estimated cost: One trillion dollars. Fact 7: Freddie/Fannie are in business one because the Fed has “bought” a trillion dollars of their “assets” and you all know how good they are. Apart from the 3/4 trillion of the porkulous package, these additional two trillion are shown nowhere.

    • az_conservative Says:

      Fact 8: The Federal reserve has purchased over one trillion dollars worth of agency paper (FM/FM) that they are prohibited from purchasing under the Federal Reserve Act.

    • az_conservative Says:

      AND the FHA reported yesterday that its fund is leveraged at more than 100:1! THAT IS INSANE and FHA WILL go the way of Fannie/Freddie at some point.

  6. ciccio Says:

    Thanks for the correction az, you quite rightly call it paper, I mistakenly called them dubious “assets”. I have been trying to get some idea of the value of the FDIC assets that they keep “acquiring”. On property they have lately been realizing some 65% of the book value, same with loans, the 505 shaky banks have some $1 trillion in assets. Look forward to a lovely new year. It is a pity Canadian banks do not work like the Feds, I was trying to get a loan backed 100% by my I.O.U. but they refused.

    • az_conservative Says:

      Wasn’t really intended as a correction, more a clarification. 🙂

      That’s a lot of the problem. No one knows exactly what these assets are worth in the real world, and a lot of them are being held off-balance sheet until the banks implode too. Makes it very hard to figure out what the real situation is. I suspect it is grim and they are intent on hiding it as long as possible. All the major banks are functionally insolvent now. If Prompt Corrective Action were being followed, they would have been shut down months (or years) ago. The FDIC is deliberately turning a blind eye, and taking a 40-60% loss on some of these banks, when PCA should shut them down before a dime is lost. Sheila Baird is either a moron or a criminal.

      As for the fed buying up MBS and CDO garbage, the FRA specifically prohibits the purchase of these instruments (Section 13, I believe). FM/FM paper states right on it that it is not backed by the gov.

      Leveraging at 100:1 or more, extend-and-pretend, fantasy valuations, etc. Blatant disregard for law, outright fraud and stealing trillions in the bright light of day, and nothing is done about it. Unreal.

      And the inverse correlation between the S&P 500 and the DX is scary. The dollar goes down, the S&P goes up and vice versa. Near perfect synchronization. Not sure exactly what that means in the long term, though…

      Hey, if Canada won’t go for that kind of deal, you should try Chicago. See ACORN.

  7. Bob Says:

    And when those banks fail from burdening debt, this administrations buddies at BoA and Citi, et. will be there to buy them out with TARP money.
    What ever happened to anti-trust laws?

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