FDIC: A New Concern for Bank Liquidity

FDIC: A New Concern for Bank Liquidity
October 01, 2009
Zachary Scheidt

What’s $10 billion between friends? That’s what the FDIC is asking a handful of large banks as the insurance operation attempts to rebuild its balance sheet. Currently, the FDIC is reeling from the losses it has taken as nearly 100 banks have gone belly up this year. As the black list of troubled banks continues to grow, the FDIC is running short on capital used to guarantee deposits.

Now before you go and pull your money out of the bank and put it under a mattress, please understand that the FDIC is not insolvent. Even under the worst case scenario where the coffers turn up completely empty, the US Treasury will extend a credit line to insure the deposits, so we are far from a place which warrants a run on the bank. But since the FDIC wants to make sure that line of credit is never actually used, they are asking four of the largest banks to pre-pay a hefty chunk of fees in order to shore up the balance sheet.

The request comes at a time when banks are struggling to re-build their ownbalance sheets and instill confidence in their financial soundness. While a fully functioning FDIC is in the best interest of all banks, prepayment is certainly not a pleasant scenario for these large banks. The institutions in question are Bank of America (BAC), Wells Fargo & Co. (WFC), JPMorgan Chase & Co. (JPM) and Citigroup (C). All four of these institutions appear to have pulled back from the brink of disaster, although Citi will still likely post a loss for 2009.

The FDIC is very much an insurance program where banks are charged premiums and in return their depositors are guaranteed against a loss (for deposits up to a maximum limit). The premiums vary by bank and are calculated based on the financial soundness of each institution. While the rates may seem too small to be significant (typically 0.12% to 0.45%), earnings on these deposits are extremely low due to the low interest rates, so the premiums certainly eat into profit. If banks are required to pay 3 years worth of these premiums by the end of 2009, it would be a significant cash-flow iss

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