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FDIC Warns It's Running Out of Funds

Flurry of bank failures could burn through FDIC's reserves

The safest place for money right now is, at least theoretically, in a bank backed by the Federal Deposit Insurance Corporation, which insures deposits up to $250,000. But hold on, FDIC Chairman Sheila Bair warns the agencys funds could be quickly used up in a flurry of bank failures.

This week Bair warned that a large number of bank failures may occur through 2010 because of rapidly deteriorating economic conditions. That makes it necessary, she said, for the FDIC to levy a one-time fee on member banks.

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, Bair said in a letter to the Independent Community Bankers of America.

The group — made up of mostly small town, rural banks that never traded in exotic mortgage-backed securities — is outraged.

ICBA President Camden R. Fine compares the FDIC to Japans attack on Pearl Harbor. He calls the special assessment on the nations 8,000 community banks crippling, and blamed greed, incompetence and sins of the Wall Street firms that so crippled this nations economy.

We have now come to the point where the systemically unimportant banks of Main Street must, along with the nations taxpayers, bail out the systemically important Wall Street firms, Fine said. Not only are a handful of Wall Street CEOs holding a gun to the taxpayers heads, they have the banks of Main Street America looking down the barrel as well.

Fine said it is ironic that on the day the special assessment was announced, struggling CitiGroup received another government bailout. He says community banks are strong and are doing the economic work the bigger banks should be doing.

During the fourth quarter of 2008, community banks had the largest percentage increase in lending across the industry, Fine said. For every dollar paid in premium assessments, a community banks ability to make loans and support economic recovery will be reduced at least eightfold.

Bair, meanwhile, says the special assessment could generate $27 billion this year, which she says is needed because the insurance fund has fallen below $20 billion. She says the fund was hard hit by 25 bank failures in 2008.

At least 14 banks have failed so far this year, many of them smaller institutions.

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