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Wednesday, April 22, 2009 3:42 PM

FDIC Woefully Underfunded; Problem Institutions Soar

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The latest Quarterly Banking Profile shows something most of us inherently knew: The FDIC is ill prepared for more bank failures.

Deposit Insurance Fund (DIF) Ratio Collapses

Inquiring minds are investigating the Deposit Insurance Fund (DIF) Ratio.

■ The DIF Balance Declines by $16 Billion, and Insured Deposits Grow by 4.6 Percent in the Fourth Quarter
■ DIF Reserve Ratio Declines to 0.40 Percent
■ Twenty-Five Insured Institutions Fail During the Year; Another Five Insured Institutions under the Same Holding Company Receive Assistance

The reduction in the DIF during the quarter was primarily due to $17.6 billion in loss provisions for actual and anticipated insured institution failures. For all of 2008, the DIF balance fell by $33.5 billion (64 percent), primarily because of $40.2 billion in loss provisions.

The DIF’s reserve ratio equaled 0.40 percent on December 31, 2008, which was 36 basis points lower than the previous quarter. During 2008, the reserve ratio decreased by 82 basis points, from 1.22 percent at year-end 2007. The December figure is the lowest reserve ratio for a combined bank and thrift insurance fund since June 30, 1993, when the reserve ratio was 0.28 percent.

Problem Institutions and Failed/Assisted Institutions

click on chart for sharper image

* For 2008, preliminary unaudited fund data, which are subject to change.

** The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250,000 in setting assessments. Therefore, we do not include the additional insured deposits in calculating the fund reserve ratio, which guides our assessment planning. If Congress were to decide to leave the $250,000 coverage level in place indefinitely, however, it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund.

*** Prior to 2006, amounts represent sum of separate BIF and SAIF amounts.

**** Five institutions under the same holding company received assistance under a systemic risk determination.

Note the effects of the The Emergency Economic Stabilization Act. The FDIC "temporarily" ups the limit and ignores the effect on DIF. This is ass backwards as the risk of bank failure is high and growing. Ignoring the increased limits is a blatant attempt to hide the fact that DIF is even more underfunded than it looks, and it looks woefully underfunded.

Reserves have plunged, no doubt on their way to negative territory as the number of problem institutions soars. Expect to see requests for more taxpayer bailouts as the FDIC well runs dry.

Mike "Mish" Shedlock
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