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FDIC Under Pressure

Posted by smeddum on August 29, 2008

Market Scan
FDIC Under Pressure Forbes
Carl Gutierrez, 08.27.08, 5:55 PM ET
The Federal Deposit Insurance Corp, the government’s designated spotter, is starting to sweat under the pressure of so many firms sitting in hot water.

The number of troubled U.S. banks rose to 117 in the second quarter, and it’ll get worse if the housing slump and credit crisis continue, according to the Federal Deposit Insurance Corp, commonly know as the FDIC. Specifically, the number of “problem” lenders increased in the second quarter to 117, with $78.3 billion of assets, from 90 lenders with $26.3 billion of assets three months earlier.

The FDIC is a government agency that insures deposits in the U.S. against bank failure; it was created in 1933 to maintain public confidence and encourage stability in the financial system.

On Tuesday, FDIC Chairman Sheila Bair said she expects more banks to join the agency’s list of troubled banks, which keeps track of institutions with financial, operational or managerial weaknesses that threaten their financial viability.

“We don’t think the credit cycle has bottomed out yet,” Bair told a quarterly news conference, adding that U.S. banks will not return to high levels of earnings anytime soon. She also said that she anticipates that banks and thrifts will keep building up reserves for the next several quarters.

So far this year, nine U.S. banks have outright failed, perhaps most notably IndyMac Bancrop, which has put a serious strain on the FDIC’s Deposit Insurance Fund to repay the insured deposits at the failed banks. In a bid to replenish the $45.2 billion fund, Bair said the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said, to encourage safer business practices. Appropriately enough, the FDIC’s report came a day before the Wall Street Journal reported on Wednesday that it might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said. The borrowed money would be repaid once the assets of that failed bank are sold.

“I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses,” Bair said in an interview.

The FDIC has short-term lines of credit of up to $40 billion from the Federal Financing Bank, which is supervised by the U.S. Treasury Department and has not been tapped since 1991. The FDIC also has another $30 billion line of credit with the Treasury Department.

In 1990 the FDIC received authority to borrow from the Treasury for working capital. In 1991 the FDIC started borrowing and eventually borrowed $15.1 billion, which was repaid by August 1993, plus interest.

Reuters contributed to this article

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