The government-administered insurance fund that protects depositors fell $8.2 billion into the red for the first time since the fallout from the savings-and-loan crisis of the early 1990s as the pace of bank failures accelerated in the third quarter. Meanwhile, the number of “problem banks” that run the biggest risk of collapse increased to 552, from 416 in the second quarter.
The agency recently approved plans calling for industry to lend money to the insurance fund by ordering banks to prepay annual assessments that would otherwise have been due through 2012. So we are paying Peter today and have nothing for Paul in the future. The FDIC could add another assessment or tap a Treasury line of credit. The cost will be borne by the banks or taxpayers. When banks have to pay the assessment, yields go down, so there is more reason to hold Treasuries. The problem is with smaller banks who have high commercial loan exposure and lend to small businesses. This is a below the market risk which can be very relevant as we end the year.
The agency recently approved plans calling for industry to lend money to the insurance fund by ordering banks to prepay annual assessments that would otherwise have been due through 2012. So we are paying Peter today and have nothing for Paul in the future. The FDIC could add another assessment or tap a Treasury line of credit. The cost will be borne by the banks or taxpayers. When banks have to pay the assessment, yields go down, so there is more reason to hold Treasuries. The problem is with smaller banks who have high commercial loan exposure and lend to small businesses. This is a below the market risk which can be very relevant as we end the year.
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