The meaningless crisis at the FDIC’s meaningless insurance fund

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The Federal Deposit Insurance Corp., which insures $4.8 trillion in bank deposits, reported today that its insurance fund was down to $10.4 billion at the end of June.

This news generated some worried-sounding headlines. Think about it for a moment, though: If the resources available to insure $4.8 trillion in deposits (it’s actually more than that, but the FDIC doesn’t say how much more for reasons I will explain near the end of this post) really amounted to only $10.4 billion, we shouldn’t be worried. We should be completely freaking out—pulling our money out of banks and stuffing it in mattresses. I haven’t noticed this happening lately. So either (a) we are a nation in complete denial, or (b) the size of the FDIC insurance fund doesn’t matter much.

I’m going to go with (b). Yes, the continuing shrinkage of the deposit insurance fund from a peak of $52.8 billion at the end of March 2008 indicates that banks are troubled. (Who knew?) But the deposit insurance numbers that really matter are how much the FDIC can borrow from the Treasury to cover any shortfalls and how much it can charge still-solvent banks to pay back any borrowings and eventually rebuild its insurance fund.

First, the FDIC’s borrowing line with Treasury: In May, Congress voted to increase it to $100 billion from $30 billion, with borrowings of up to $500 billion possible if the Federal Reserve Board and the Treasury Secretary give their okay. So we’re talking about $510.4 billion currently available to insure depositors. What’s more, Congress has stated in the past that FDIC-insured deposits are “backed by the full faith and credit of the United States.” If losses passed $510.4 billion, Congress would presumably be good for them. If it welshed, argentined russia’d vallejoed jeffersoncountied, that would amount to a default on the nation’s obligations.

Taxpayers aren’t supposed to end up footing the cost of bank failures, though. Banks are, through the assessments (insurance premiums, basically) levied by the FDIC. The cost of these assessments tends to get passed on to depositors (in the form of lower interest rates on insured deposits), and those depositors are for the most part taxpayers, but let’s not get too fancy here. In the second quarter, FDIC assessments brought in $9.1 billion. Loss provisions for bank failures rose $11.6 billion in the quarter. That discrepancy explains why the insurance fund shrank (there were other income sources and costs, but they just about canceled each other out).

Over 10 years, $9.1 billion in assessment income per quarter would bring in $364 billion—enough to cover far more bank failures than we’ve seen so far. And assessments are headed higher: The legislation last fall that temporarily increased the insured-deposit limit from $100,000 to $250,000 instructed the FDIC to ignore the increase in setting assessments through the end of the second quarter of this year (so as not to overburden troubled banks). That’s why insured deposits are actually significantly more than the current FDIC tally of $4.8 trillion—because that tally ignores deposits between $100,000 and $250,000. This will be fixed in the FDIC’s next quarterly report.

So here’s the summary: If you believe in the full faith and credit of the U.S. government and the future profitability of the U.S. banking industry, you really don’t need to worry about the size of the FDIC’s insurance fund. And if you don’t believe in the full faith and credit of the U.S. government and the future profitability of the U.S. banking industry, then you’ve got far bigger worries than $10.4 billion at the FDIC.

The size of the FDIC’s insurance fund does matter politically. If FDIC chairman Sheila Bair has to borrow money from Treasury, her enviable freedom of movement (born of the fact that the FDIC doesn’t need appropriations from Congress to pay its bills) will be sharply restricted. Members of Congress will start being much tougher on her at hearings; Treasury Secretary Tim Geithner will become more master than peer. So Bair would certainly like to avoid exhausting that $10.4 billion. But that’s her concern, not yours.