The FDIC may need a loan

“…When you deposit money in a bank, the bank does not put the money into a safe deposit vault. It invests your money in many different forms of credit-bonds, commercial paper, mortgages and many other kinds of loans. … A comparatively small part of the money you put into the bank is kept in currency. … In other words the total amount of all the currency in the country is only a small fraction of the total deposits in all of the banks.”

— President Franklin D. Roosevelt, March 12, 1933

Go into almost any bank’s lobby today and you’ll see a comforting sticker advising you that your money is insured. Thanks to the Federal Deposit Insurance Corp., your deposits with XYZ Bank are covered up to $250,000. So, not to worry? Well, maybe no, and then again, maybe yes.

The general public’s assumption about the FDIC is that no matter what happens to their bank, their deposits are safe. This has served to anesthetize the average depositor’s concern about the financial health of their bank. No need to check the balance sheet, after all, if there’s the FDIC out there to insure against any risk of bank failure.

However, it is beginning to occur to the FDIC as well as some banking customers that its resources are not infinite. Since June 2008, the FDIC has had to cover deposits as more than 250 banks have failed. The FDIC’s funds were at the $10 billion mark in June — down from $40 billion a year ago. An equity researcher at Rochdale Securities earlier this month predicted that another 150 to 200 banks may yet fail as the economy continues to work its way out of overleveraged quicksand. If that comes to pass, it will mean the FDIC will have to come up with some more money, because $10 billion won’t cover the losses.

Where will the FDIC get that cash? Well, how about a loan? Most of it will come from the taxpayers in the form of borrowed money from the federal government, which has extended to the FDIC a $100 billion line of credit. And some of it will come from none other than bank customers. That’s because ultimately, it will be the customers who likely will be paying one way or another for the special assessments the FDIC will be levying against member banks. Those insured banks paid out $2.6 billion in these fees at the end of the first quarter of ’09, up from $1 billion at the end of 2008.

The industry and market watchers expect more FDIC fees slapped on member banks by the end of this year, and more to come by the middle of 2010. This likely will translate into higher interest rates on certain types of loans by member banks, lower rates on deposits, and special fees for certain services.

Created in the aftermath of the bank failures of 1933, the FDIC has fulfilled its mission of monitoring the health of banks, and underwriting the deposits of Americans within reasonable limits. But it’s wrongheaded to suppose that this all happens for free. The price we all pay for unhealthy banks will continue to rise as the nation continues to work its way out of the debt morass. That’s why it’s smart for consumers to do their own research before they fill out that first deposit slip.