The FDIC’s ‘Red’ Menace

The fund protecting your bank deposits has sunk "into the negative." Should you worry?

fdic-logo-_-sealA few hours ago, news came across the transom that the government insurance fund that protects consumer bank deposits “slipped into the red,” after some 50 banks collapsed between July and the end of September this year.

Such headlines are more than a little disturbing for the average bank account-holder. We all know by now that the Federal Deposit Insurance Corporation (FDIC) is the government entity that guarantees the safety of the money we’ve deposited into its member banks. If your bank (or mine) goes under, the government will cover your losses up to $250,000 per person, per bank. The FDIC has been working overtime in the last year, helping to put collapsing banks out of their misery.

So what does it mean when the insurance fund that backs our bank deposits falls into “negative territory,” as the Wall Street Journal put it this afternoon? Here’s the math: The FDIC looks out over the next year and estimates the amount of money it will need to help failing banks. The government’s deposit insurance fund currently has $30.7 billion stored away. But, FDIC’s number-crunchers anticipate that they’ll need $38.9 billion to cover losses between now and September 30, 2010. As a result, FDIC is $8.2 billion short of what it will need to clean up future failures. It’s the first time since 1992 that the fund finds itself in such a predicament.

The deposit insurance fund’s current status, FDIC spokesman, David Barr told Black Enterprise, “has no impact on the ability of the FDIC to protect depositors. It’s one picture of our resources,” he noted, “but not a complete picture.” Indeed, in a press conference earlier today FDIC Chairman Sheila C. Bair said, “the FDIC’s deposit guarantee is absolute, backed by the full faith and credit of the U.S. government. This means that we will always have access to the resources we need to protect depositors.” Bair pointed out that the FDIC’s current cash balance (which is different from its deposit insurance fund) is $23.3 billion.

To that end, the FDIC is asking its more than 8,000 insured member-institutions to prepay their insurance premiums, essentially for three years worth of coverage. Banks are expected to shell out roughly $45 billion to the FDIC by December 31. As Bair explained in her press conference, “bank failures cost money.”

Today’s news shows that, even amid small signs of U.S. economic recovery and a stock market rebound, the banking crisis is far from over. The 50 banks that collapsed in July, August, September of this year marked the second highest quarterly failure rate in 19 years. Beyond those banks, many more are in trouble. The FDIC’s list of “problem” institutions stands at its highest number in 16 years, at 552. So, in the coming months it seems, we’ll have to endure more panic-inducing headlines like this afternoon’s, because many of those banks are destined to crumble. The FDIC is asking Americans to keep the faith. When it comes to your bank deposits, do you feel as if you’re in good hands?

John Simons is the senior personal finance editor at Black Enterprise magazine.

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