Outlook for Deposit Insurance

Bloomberg News was the target of an open letter from Andrew Gray, the FDIC’s Director of Public Affairs, addressing sloppy journalism in discussing the insurance fund and the potential for a ‘bailout’. The letter, which should make the reporter feel like a child sent to the principal’s office, include the following:

Bloomberg reporter David Evans’ piece (“FDIC May Need $150 Billion Bailout as Local Bank Failures Mount,” Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a ‘bailout.’

...Mr. Evans’ suggestion that the “government” could ever be “on the hook for uninsured deposits” demonstrates a misunderstanding of FDIC insurance. To protect taxpayers, we are required to follow the “least cost” resolution, which means that uninsured depositors are paid in full only if this is the least costly option for the FDIC. This usually occurs when a bidder for the failed bank is willing to pay a higher price for the entire deposit franchise. We are authorized to deviate from the “least cost” resolution only where a so-called “systemic risk” exception is made. This is an extraordinary procedure which we have never invoked. And again, any money we borrow from the Treasury Department must be repaid through industry assessments.

I am confident in the strength of the FDIC’s resources to make good on our sacred pledge to insured depositors. And, remember, no depositor has ever lost a penny of insured deposits, and never will.

Notice the comment about replenishment through industry assessments. If you think back to the years following the S&L crisis, deposit insurance rates were 23 to 31 basis points. With most banks paying around 8 basis points now, the proposal for restoring the fund will probably take us back to the days of 20+ basis point premiums. On October 7, the FDIC Board is scheduled to announce its plans for replenishing the fund.