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.Explore posts in the same categories: Abuse of Power, Economics, Money, politics