FDIC Going Broke and Why Bank Fees will Keep Rising

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Here’s a worrying byline on many levels: Federal Deposit Insurance Corp (FDIC) Chairman Sheila Bair said that the deposit insurance fund used to protect bank account holders could be insolvent this year, unless the agency imposes additional fees on the industry amid a surge in bank failures.

The first thought that runs through my mind is, “will the money in my account be safe if the bank goes bust? Should I cash out now?” I have an account with Citigroup, and before the government semi-nationalized the firm, this was a real possibility. The FDIC provides insurance for accounts up to $250,000 and if that insurance were to disappear I can almost guarantee there would be a run on the banks, the like we have never seen before.

So it is highly unlikely, nay impossible, that the US government would let the FDIC go under and hence the additional fees it wants to charge to bolster its insurance fund will get passed without too much trouble. Banks will off course complain, but hard to do so when taking billions in tax payer bailout money, so they will do the next best thing for them – pass on the fees to their customers. The same ones who pay taxes, that funded the financial sector bailout. Full circle – and once again you and I are paying more.

Here’s more on the story from Bloomberg:

A large number of bank failures may occur through 2010 because of rapidly deteriorating economic conditions,” Bair said in the letter. “Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative.”

The FDIC last week approved a one-time “emergency” fee and other assessment increases on the industry to rebuild a fund to repay customers for deposits of as much as $250,000 when a bank fails. The fees, opposed by the industry, may generate $27 billion this year after the fund fell to $18.9 billion in the fourth quarter from $34.6 billion in the previous period, the FDIC said. The fund was drained by 25 bank failures last year.

U.S. community banks plan to flood the FDIC with about 5,000 letters in protest. They are outraged over the one-time fee, which could wipe out 50 percent to 100 percent of a bank’s 2009 earnings, Camden Fine, president of the Independent Community Bankers of America, said today in a telephone interview. “I’ve never seen emotions like this,” said Fine, adding that he’s received more than 1,000 e-mails and telephone messages from angry bankers. “Community bankers are feeling like they are paying for the incompetence and greed of Wall Street” he said.

“The FDIC realizes that these assessments are a significant expense, particularly during a financial crisis and recession when bank earnings are under pressure,” Bair wrote. “We did not want to impose large assessments when the industry and economy are struggling. We searched for alternatives but found none better.”

Bair rejected arguments that the agency should use government aid to rebuild the fund. The FDIC has authority to tap a $30 billion line of credit at the Treasury Department. “Banks, not taxpayers, are expected to fund the system,” Bair said. Asking for taxpayer support “could paint all banks with the ‘bailout’ brush.”
I found another circular logic issue with Bair’s statement – “Banks, not taxpayers, are expected to fund the system.” Haven’t the US tax payers already bailed out most of the banking industry? Won’t those funds that go to the banks, now be used to pay the higher FDIC fees (rather than being lent out as was the intended purpose)? So at the end of the day tax payers will indirectly fund the FDIC anyway, and end up taking a one-two punch to their finances. Firstly, their taxes will be potentially wasted on bank bailouts that don’t seem to be working; secondly – and more directly – they will be hit with higher banks fees. Just what we need in already tough financial times. Makes you almost want to cry with laughter!

Related:
~ Rates on Savings Accounts and CDs Set to Increase
~ High Interest Savings Accounts with Good Yields
~ I Want My Bailout Too and Here’s Why

[Update] Your Bank Has Failed: What Happens Next? 60 Minutes provides a rare look at how the FDIC takes over banks and reassures depositors

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