Will the FDIC Need a Bailout Too?

By Paul Kiel, ProPublica. Posted March 11, 2009.

We've tended to focus our bailout coverage on the billions of taxpayer dollars doled out by the Treasury Department. But Treasury hasn't been working alone, of course. There's the Federal Reserve, that opaque public-private institution that measures by the trillion. And then there's the Federal Deposit Insurance Corporation (FDIC), which has been working shoulder to shoulder with the Treasury and Fed, as well as catching banks as they fall.

It's looking increasingly like the FDIC will have to turn to Treasury to help it weather the storm. As you can see in this graph, FDIC's deposit insurance fund has plummeted in the past year as a growing number of banks have failed.

The FDIC's deposit insurance fund, over time.

"We'd like a bigger cushion," FDIC Chair Sheila Bair said on CBS' Early Show this morning. The fund relies on fees from member banks, and Bair held out hope that a recent bump in those fees would provide enough cushion. But if it doesn't, Bair said, people shouldn't be nervous about their FDIC-insured accounts: "It is important for people to understand, we're backed by the full faith and credit of the United States government. The money will always be there. We can't run out of money."

New legislation requested by the FDIC and the Fed seeks to make sure that's true, even if FDIC's cushion proves dramatically inadequate. The legislation would allow the FDIC to borrow $100 billion from Treasury and as much as $500 billion with White House approval. Currently, FDIC only has access to up to $30 billion.

It wouldn't be the first time that the Fed has been forced to borrow from Treasury. Back in the early nineties, as you can see in the graph, the fund dipped into the red from the continued pressure of the hundreds of bank failures due to the savings and loan crisis. The FDIC paid back the loan with interest within a couple years. But things now are deteriorating rapidly enough for regulators to be concerned.

Until recently, FDIC Chair Sheila Bair had insisted that the FDIC could survive without taxpayer help. In September, Bair responded sharply to a Bloomberg News piece that reported that the Treasury "will almost certainly come to the rescue by lending money to the FDIC," possibly as much as $150 billion.

See more stories tagged with: economy, bailout, financial crisis, treasury, fdic

Paul Kiel is a reporter for ProPublica. He's written for TPMmuckraker, Talking Points Memo’s investigative reporting blog, from 2006 to 2008. TPM’s coverage of the firings of U.S. attorneys and politicization of the Department of Justice won a George Polk Award for legal reporting.

Liked this story? Get top stories in your inbox each week from Corporate Accountability and WorkPlace! Sign up now »