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FDIC: Bank Fund In The Red

But officials claim economy remains solid

By Martin H. Bosworth
ConsumerAffairs.com

October 14, 2009

"As of June 30, 2009, the balance of [the fund] was approximately $10 billion," Bair said in testimony before the Senate Banking Committee's Subcommittee on Financial Institutions. "Losses from institution failures have caused much of the decline in the fund balance, but increases in the contingent loss reserve -- the amount set aside for losses expected during the next 12 months -- has contributed significantly to the decline.

"The FDIC estimates that as of September 30, 2009, both the fund balance and the reserve ratio were negative after reserving for projected losses over the next 12 months, though our cash position remained positive," Bair said.

But despite the worst economic climate in decades and a virtual standstill in lending to businesses and consumers, the majority of U.S. national banks are solvent and capable of withstanding "a decline in credit quality," testified John Dugan, Comptroller of the Currency.

"While many challenges lie ahead, especially with regard to the significant decline in credit quality, I firmly believe that the collective measures that government officials, bank regulators, and many bankers have taken in recent months have put our financial system on a much more sound footing," Dugan said.

Bair was not so optimistic in her testimony. "While we are encouraged by recent indications of the beginnings of an economic recovery, growth may still lag behind historical norms," she said."

"There are several reasons why the recovery may be less robust than was the case in the past. Most important are the dislocations that have occurred in the balance sheets of the household sector and the financial sector, which will take time to repair," she said.

Bair and Dugan emphasized that banks should be lending, rather than hoarding capital and cutting access to credit, and that regulators should be employing "a balanced approach" to help customers stay current on their mortgages and loans rather than falling into delinquency.

"Our most recent quarterly report on Mortgage Metrics shows that actions by national bank servicers to keep Americans in their homes rose by almost 22 percent in the second quarter...We view this as a positive development, since modifications that result in lower monthly payments are less likely to re-default."

Bair also discussed a proposed change to FDIC policy that would force FDIC-backed banks to prepay three years' worth of their riskiest assessments, in order to insure that the FDIC's bank fund does not deplete as easily if the bank should fail.

98 banks have failed or closed this year, triggering a wave of failures in mortgage lenders as well. Other banks have shuttered as a result of mortgage lenders collapsing, as in the case of Taylor, Bean, & Whitaker, leaving customers in the lurch with little hope of recourse.

Bair warned that even with the actions being taken, "The FDIC projects that, over the period 2009 through 2013, the fund could incur approximately $100 billion in failure costs. The FDIC projects that most of these costs will occur in 2009 and 2010."

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