Bank Failures Take Toll on Insurance Fund

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, February 27, 2009

The federal insurance fund that protects most bank deposits is being drained by a sharp rise in bank failures and has dwindled to its lowest level since 1993, the Federal Deposit Insurance Corp. reported yesterday.

Depositors are not at risk because the fund is backed by the government, but taxpayers could be forced to reach into their wallets if the decline continues.

When a bank fails, the FDIC pays up to $250,000 to each account-holder to replace whatever money does not remain in the vaults. The fund is replenished by assessments on banks, but over the last year, much more money left than arrived. And the pace of bank failures continues to increase.

The fund held $52.4 billion at the beginning of 2008. One year and 25 bank failures later, the fund held $18.9 billion.

So far this year, 14 banks have failed, draining another $1.7 billion from the insurance fund.

The FDIC's board is scheduled to vote this morning on increasing the quarterly assessment that banks must pay. The board also could vote to impose a one-time special assessment to replenish the fund more quickly. FDIC officials declined to say yesterday how large an increase was likely.

If money cannot be collected quickly enough from the industry, the FDIC could be forced to borrow money from taxpayers by taking a loan from the Treasury Department.

Some banking trade groups favor that approach, because they say that a sharp increase in the assessment on banks would overly burden a struggling industry, taking away money that banks otherwise could use to lend. Banks would then repay the money gradually and as the industry's situation improved.

But FDIC Chairman Sheila C. Bair said yesterday that the industry must carry the cost, and she noted that the fund is a huge boon to banks at a time when some people and companies might otherwise hesitate to deposit money.

"It's painful to get your premiums raised, but I think deposit insurance is a really good bargain right now," Bair said. "It's a value, and unfortunately we're going to have to charge more for it."

The FDIC also reported yesterday that the nation's banks collectively lost $26.2 billion in the fourth quarter, the first negative quarter for the industry since 1990. Total lending in the fourth quarter declined 0.4 percent compared with the same period in 2007, the agency said. The report is based on data provided by each bank.

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