If Enough Banks Fail, The FDIC Could Run Out Of Money

Everyone knows that your money is safe in an FDIC insured bank because if the bank fails (Hello, IndyMac!) the FDIC will step in and repay your money (generally, up to $100,000.) But what if the FDIC runs out of money? It doesn’t have an unlimited supply and enough bank failures could completely drain its fund, says ABCNews:

Thanks to a collapsing housing market and a weak economy, a growing number of banks are struggling to stay afloat, with not enough cash on hand to cover losses from bad loans.

At the beginning of the year, 90 banks were on the FDIC watch list. There are now 117, FDIC chairwoman Sheila C. Bair announced at a news conference this afternoon. That is the highest number in five years, but some analysts expect the list to grow even more in coming months.

“I think there’s going to be a steady drip, drip, drip of bad news,” said Sean Ryan, a banking analyst with Sterne Agee. “We’ve only seen the very tip of the iceberg in terms of bank failures.”


“I fully expect the FDIC insurance fund to be depleted,” Ryan added. “The FDIC is going to be one of what is going to be an increasing string of government bailouts.”

So should you worry?

Nah, says one expert:

Ultimately though, Ryan said depositors with less than $100,000 in the bank have nothing to worry about.

“The reality is anybody who is within that threshold shouldn’t lose any sleep at night,” he said. “For all the kind of unjustifiable bailouts being done on Wall Street there’s no chance that the government is going to let John Q. Public’s money disappear.”

Still, the numbers are sobering. The FDIC currently has about $50.2 billion in its fund — 20% of which will be depleted by the recent IndyMac failure. How many more IndyMacs do we have to look forward too? Who knows.

FDIC Warns of More Bank Troubles [ABCNews]

Comments

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  1. Jabberkaty says:

    Everybody PANIC!

    Better get my money out of the bank now – I’m sure that will only help matters. :)

  2. BoomerFive says:

    Great, back to putting it in the mattress.

  3. EarlNowak says:

    The FDIC has broad borrowing authority by law. They have a perpetual line of credit at the US Treasury for $30 billion, and they can issue federal and state tax-exempt bonds. Codified at 12 USC 1824 & 1825.

    Even if all the banks on the problem list fail, the FDIC will be able to cushion the blow, and recover it’s funds over the next few years by increasing insurance premiums. So don’t panic.

  4. Hogan1 says:

    I dislike FDIC panic stories because they are sensationalist and do nothing but encourage some of those challenged by their limited comprehension of common sense to start taking action that I’d define as illogical…such as pulling money out of a bank.

  5. azntg says:

    “…there’s no chance that the government is going to let John Q. Public’s money disappear.”

    The government sure is good at making John Q. Public’s tax money disappear though!

  6. mazda3jdm says:

    i work for a bank which is not in any trouble because we dont give out mortgages to just any one you have to have atleast 10-20% down and a really great credit history.

    • laserjobs says:

      Nobody should have more than the FDIC limits in any bank. With the use of brokered CDs and CDARS you can keep up to $50 million per accout holder insured. If you are under the FDIC limits there is no reason to panic and leave your money where it is.

      @mazda3jdm: What is your bank’s comercial loan exposure? Small banks are screwed with CRE loans, it just has not visably hit yet.

  7. timmus says:

    The links at the site [www.fdic.gov] were actually quite good and I was able to assure myself what condition my small bank is in.

  8. chuckv says:

    Time to start converting my assets to gold deposits in Swiss banks

  9. Matt says:

    Odd because Reuters just posted a similar story saying that the FDIC has guaranteed funding from the Treasury.
    [www.reuters.com]

    • hellinmyeyes says:

      @Matt:

      I saw that story, too. It’s not odd. In fact, this indicates the FDIC is likely to take over several banks in the next couple months.

      I don’t see this as a sensationalist story but really a glimpse at things going on behind the scenes we ordinarily wouldn’t see.

      I’m curious about the Consumerist figure on 20% of their funds going to the IndyMac failure. Surely you don’t mean that FDIC is paying out all IndyMac’s assets. Most of it is being sold away to other firms, and the FDIC is expected to be recapitalized after those sales. Also curious about the “too”… (grr, proofread)

      • jeetsta says:

        @hellinmyeyes:

        According to the linked article, IndyMac had $19 billion in assets, but $1 billion weren’t insured, and they had enough other stuff to pay $9.1 billion. The remaining $8.9 billion is what the FDIC has to foot, and since it has a $50 billion pot total, that’s where they get the 20%. But you’re right, the FDIC has the ability to sell parts of the bank off to pay for it…that just takes time.

      • Matt says:

        @hellinmyeyes: Sorry I mean the odd to be directed at this story of running out of money, not at the Reuters story. I should learn to post better early on in the morning.
        I’ve been reading a lot of articles about how the US could soft default on their massive debts by simply making the dollar decrease in value. Sort of scary to think that the government would significantly drive down the value of their own currency to avoid paying back debts in ‘real’ dollars.

  10. dragonfire81 says:

    Goodness this whole housing/mortgage crisis seems to have set off one of the largest economic domino effects in U.S. history.

  11. sirellyn says:

    Ugh. First off, if the government bails the FDIC out, expect visible hyperinflation. Not the 12% or so per year now, it will raise to 20% or more. It has to get the money from somewhere and no one is willing to loan the US money right now. (And can you blame them?) So bailing out would be BAD, Argentina style bad.

    Second the US government has proven it has little regard for their own laws as of late. So don’t count on them actually bailing anyone out anyway, it’s likely but don’t count on it. After all, gold and silver are at all time lows this year and the US mint has SUSPENDED production of their gold and silver coins which they are to ensure BY LAW that they always have enough to meet public demand.

    Don’t believe me? Fine. Check out some of the charts for yourself.

    [www.nowandfutures.com]

    • HIV 2 Elway says:

      @sirellyn: 12% inflation? I think you’re off by a factor of two a factor of two.

      • HIV 2 Elway says:

        @HIV 2 Elway Resurrected: Pete and repeat get in a boat…

      • TheFlamingoKing says:

        @HIV 2 Elway Resurrected: I think you’ve fallen for the idea that government inflation numbers are equivalent to actual inflation. That’s not going to be true, actual inflation is usually higher. That’s especially true now that we don’t get regular figures on M3 money supply.

        12%, however, is probably just someone’s overly exaggerative mind trying to justify why gas and groceries cost so much more in their budget…

        • HIV 2 Elway says:

          @TheFlamingoKing: One can also say that government inflation figures are high because they don’t take buyer behavior into consideration. If there is a late freeze and the orange crop is devastated, orange prices drive up CPI, making inflation look worse. The now inflated CPI doesn’t consider that consumers will just buy less orange juice.
          Either way, 12% is some sensationalist number.

          • Orv says:

            @HIV 2 Elway Resurrected: Actually, the CPI sometimes does replace one item in its “basket” with another equivalent item, if a particular item has a large runup in price. It’s called “product substitution.” It’s also geometrically weighted so that products with prices that are increasing rapidly affect the index less, because it’s assumed people will consume fewer of those products.

    • cf27 says:

      @sirellyn: Hyperinflation? You’re suggesting that it’s just going to print the money? That’s alarmist. And your facts are off:

      (1) the government is not having a problem getting people to buy its bonds. The yield on a 30-year bond is only 4.4%; when Bill Clinton left office, it was 6.7%. Yield and price are inversely proportional — basically, this means that there’s more demand for US bonds now than there was in 2000.

      (2) the annualized inflation rate is only about 3.9%, nowhere near 12% (the actual amount depends on the time horizon that you’re looking for — over the past 2 weeks, it’s actually negative since the price of gas has fallen). Most of the increase comes from gasoline prices, which appear not to be heading up any more.

      (3) The US mint is supposed to, by law, ensure that there is enough supply of coins for *circulation*. Circulating coins contain neither gold nor silver. The US mint does make some “collectible” gold and silver coins for collectors, but this is a profit-making enterprise, which they are authorized, but not required to do. And, in fact, they are still creating these coins — consider the “First Spouse” gold coins or the silver proof sets.

    • GearheadGeek says:

      @sirellyn: I don’t think you have a clear idea of what “all time low” means. Gold is presently trading near its low for 2008, but percentage-wise it’s very close to its 5- and 10-year highs (much closer than it is to the lows for those time periods. Silver is farther off its 5- and 10-year highs, but still at well over 2x its 5- and 10-year lows.

      So, if you’re going to be alarmist, at least try to be convincing.

    • huadpe says:

      @sirellyn: Um, where are you getting those inflation numbers from?

      Current inflation is 4-5%, not 12, and 20% doesn’t fit any economic definition of hyperinflation.

      A bailout of 50 billion from the fed would add 50 bn to the economy, and with a 2x money multiplier (which is about realistic for our economy), add a total of $100 billion.

      $100 billion is less than 1% of total US GDP and WAY less than 1% of outstanding dollars. It would cause a small (couple tenths of a percent) increase in inflation at most, not 8%.

      8% inflation would take an infusion of something like $2 trillion new dollars.

  12. bohemian says:

    What is currently bothering me is that it is almost impossible to openly and legally open an account with a foreign bank. Barclays states that they can’t allow US citizens to open an account with their UK division, you have to open with the US division. Someone suggested we look at Canadian banks for an online savings account. That looked like a possibility but we were not sure about that either. I think you can still get a Swiss Post account.

    So why is our govt. making it so hard for someone in the US to bank outside the country? If we really have an international we should be able to do that as long as we declare interest like you do for a US bank.

    • sir_eccles says:

      @bohemian: The answer is in the last line. Currently there have been too many people “accidentally” not telling the IRS about their overseas funds.

    • Orv says:

      @bohemian: The government makes it hard to bank outside the U.S. because offshore bank accounts are mostly used either for money laundering or to try to hide money from the IRS.

  13. esqdork says:

    Private risk coupled with public bailouts is asinine. The bankers, hedge funds and others who got in early on this last bubble profited hugely from the run-up and the cost of failure will be borne by taxpayers, most of whom did not derive a benefit. What. The. Hell?

    • bohemian says:

      @esqdork: It is like they practically rewarded this crap. I also noticed that about a year ago there were stories how the uber rich were putting their money into gold and foreign entities. Take the money and run.

  14. bohemian says:

    Ahem. International economy. sorry rented fingers.

  15. mannyv says:

    This story is pure fearmongering. The S&L meltdown was a lot bigger than even the worst-case projections of today’s bankign problems, and we didn’t see hyperinflation or a lack of funding on the part of the agencies involved.

    The analyst in question (Sean Ryan) is either totally incompetent, hopelessly clueless, or both. In any case he’s demonstrating a lack of understanding of how the system actually works. Either that, or he’s a short-seller.

  16. CountryJustice says:

    “The FDIC is going to be one of what is going to be an increasing string of government bailouts.”

    Wait, how is it a bailout when the government allots money to a federal agency?

    Next thing you know, our tax dollars will be spent “bailing out” all those crybaby soldiers in far-away lands.

    • zeroraveson says:

      @CountryJustice: I’m pretty sure the FDIC is set up as a Government Owned Corporation, like Amtrak, instead of being an actual federal department, like the Office of the Comptroller of the Currency.

      • Erwos says:

        @zeroraveson: It is indeed. But this is more of a budget thing than anything else. It’s _supposed_ to be self-funding, and so far, so good. But if it runs out of money, well, the government is on the hook, because they own them, like any other corporation.

        • EarlNowak says:

          @Erwos:

          What, is everyone ignoring me?

          The FDIC raises funds by charging premiums- for most banks, between 5 and 7 cents per hundred dollars on deposit. They can raise or lower premiums to cover costs.

          The FDIC has a huge amount of money they can draw from- including borrowing money from the US treasury at below-market costs, and issuing (very attractive) tax and federal tax-exempt bonds, which will probably be bought up by savvy national and international banks and hedge funds, because the credit rating of the US government is still solid gold, despite Bush’s best efforts.

          The FDIC can pay back any money borrowed by increasing premiums on banks in the future- once things are under control again. If they need more money, rather than a bailout, congress can authorize the issuance of more bonds. The FDIC absolutely is self funding.

          This isn’t a bad business plan at all- in fact, it’s the way a mutual insurance company is supposed to work.

  17. TheFlamingoKing says:

    FTA: “For all the kind of unjustifiable bailouts being done on Wall Street there’s no chance that the government is going to let John Q. Public’s money disappear.”

    Nope, just John Q. Public Jr. and John Q. Public III’s money…

  18. Greasy Thumb Guzik says:

    Supposedly Citigroup, Citibank or whatever it’s called toady is on the list. If it goes, FDIC collapses.

    • hellinmyeyes says:

      @Greasy Thumb Guzik:

      I see that happening more like a Bear Stearns type event. Discreet, overnight, no BS except for all the employees waiting for pink slips and all the shareholders left in disgust. Did you see the article where they’re asking employees not to make color copies? THAT’S a true sign they’re worried about going under! lol

  19. chauncy that billups says:

    Some 3,000 banks failed during the S&L crisis in the 80′s. The FDIC didn’t go under then – why would it have trouble now? Some years saw more than $100bn in assets lost. The largest bank failure in history was in ’84 with a $40bn failure Continental Illinois (about $78.8bn in today’s dollars). This is not to say we couldn’t see larger failures in the future, but let’s just get some perspective, hmm? My guess is that the FDIC will be fine.

    • rugman11 says:

      @bilups: You are exactly right. Exactly .1% of banks in this country have failed and 1.3% are on the watch list, up from 1.15%. Most of these are small banks with millions in assets, not billions, and which actually go under quite often. I would be shocked if any other financial institution as big as IndyMac collapses. Basically, 99.9% of banks are still open and 98.7% of banks are in no danger whatsoever.

      If anyone is really that panicked about the whole thing, they can go to this site which will let you search for your bank and see its current financial standing. This article is just stupid fearmongering which is only going to cause trouble, not prevent it.

      • BrianDaBrain says:

        @sirellyn: Wow! Back off the panic button, please!

        @cf27: Ah, sensibility

        @rugman11: That pretty much covers it I think.

        @varro: Agreed. Down with WaMu!!! :)

        I like it when everybody else has already made my points for me.

    • mac-phisto says:

      @bilups: the only thing is, there were A LOT more banks back then. today there’s less than 10,000 banks in the u.s. & we’ve experienced over 8,000 mergers in the 3 decades since 1980. the most disturbing trend is the acceleration of large bank mergers since the mid-90′s. here’s an interesting article (a little dated) with data on mergers -> [www.federalreserve.gov]

      today, something like $1 out of every $3 is on deposit at one of the largest 50 banks in the u.s. to give you an idea of how crippling it would be for a few of these to fail – indymac would be ranked ~#34 on that list.

      do i really think we’re going to see a massive failure? no. at least i certainly hope not. but i think a really, really smart move would be to replace the restrictions put in place by glass-steagall & require banking institutions to divest their holdings in securities & insurance.

    • stevejust says:

      @bilups: Okay, but here’s some problems with your analysis. The S&Ls were covered by the FSLIC & the FHLBB NOT the FDIC.

      And if you will recall, George HW Bush signed legislation stealing $124 BILLION dollars from us–the tax payers– to bail out the S&Ls. One of the beneficiaries of that bailout was Charles Keating. Do you remember the senators that were a part of the infamous “Keating 5?” Yeah, that’s right, John McCain was one.

      So let’s fast forward from 1991 until today, 2008. We have another George Bush in the Whitehouse, and we’re headed toward another humongous bank bail out, this time the crisis is perhaps much bigger than the previous largest financial debacle in the US.

      If I were a tinfoil hat type, I’d say there’s something fishy going on here, since 100% of the time we’ve had a George Bush as a president, 100% of the time there’s been a financial melt down.

      And sure, you can say it’s just a coincidence. But what a coincidence it is. And if you start trying to figure out where all the taxpayer bailout money actually goes when these institutions get bailed out, it becomes even more interesting.

      But I’m sure it’s just a coincidence, in the same way that Saul Williams points out that “it’s just a coincidence that oil men would wage war on an oil rich land.”

  20. laserjobs says:

    The real story the MSM is not reporting:

    The FDIC was NOT charging any insurance premiums for highly rated banks for the last 10 years!!!

    Thank the American Bankaing Association lobbyists for keeping the FDIC underfunded with the banks taking on high risk at the time.

    THIS IS THE REAL STORY NOBODY IS REPORTING!!!

  21. rugman11 says:

    Ah, bad HTML. This is the site:
    http://www.bankrate.com/brm/safesound/ss_home.asp

  22. varro says:

    $50 billion – that’s about two months of Iraq War.

    End the war, and Wamu and Wachovia could go down without a ripple to the Treasury.

  23. floraposte says:

    The FDIC is collecting premiums this whole time as well, so it’s not like the funds remain static.

  24. SOhp101 says:

    The title of this post is amusing. It’s like saying, “if Wal-Mart’s sales continue to drop, it could go out of business.”

  25. CarlR says:

    So, wait a minute …

    If there wasn’t enough $$ at IndyMac to cover the insured deposits, why is the FDIC covering a significant percentage of the UNINSURED deposits? Reports were that 50% of the uninsured deposits were being covered initially, with the expectation of more to follow.

  26. stevejust says:
  27. Caveat says:

    If we are to trust the FDCI, why doesn’t it publish its list of troubled banks? Is it only for insiders to know and not for the small depositor to be informed? Do they fear runs on the banks whose names they publish? If they have access to so much money, they can easily prove to the small investors that there is nothing to fear by channeling money out of those banks. Isn’t capitalism about rewarding the efficient and doing away with the weak? Why are depositors deprived from knowing which are the weak banks and having a chance to move their funds to a stronger bank? Capitalist economic theory would indicate that the troubled banks should be allowed, perhaps even encouraged to fail, so that new more efficient banks with better management can replace them.

    PS. Don’t rely much on any of the rating services provided on the FDIC web site such as Bankrate or Bauer. If you check them out, you will find the worst banks not rated, and Washington Mutual FS & LA of Seattle, Washington with 4 out of 5 stars. Sounds great, right? Then Google Washington Mutual in the news and you will find that they are in a heap of trouble. Someone is trying to pull the wool over our eyes…

    • Orv says:

      @Caveat: Fear of runs on banks is exactly why they don’t publish a list. Any list of troubled banks would quickly become a self-fulfilling prophecy.

    • MercuryPDX says:

      @Caveat: ummm… a rating of ’1′ is superior:

      “A CAEL rating of 4 or 5 does not suggest that we believe direct regulatory action is imminent or even likely. A CAEL rating of 4 or 5 only indicates that certain below average performance factors have been found during the applicable rating cycle.”[www.bankrate.com]

  28. RogerDucky says:

    Uh… for people expecting hyperinflation if the FDIC is “bailed out”…

    No, it won’t happen due to that. Inflation happens if the money supply *increases* while the goods available stays constant or shrinks. Failed banks shrinks money supply in the economy by making a chunk of savings go “poof.” FDIC just ensures most of the money in savings accounts would remain available to spend.

    Why do that? To avoid catastrophic bank runs that happened in the 1920s — A few big banks failed, causing people to fear that their savings are in danger, thus causing people to hurry into their bank to withdraw their savings, which causes more banks to fail, etc…

    Also, FDIC is structured the way it is just to ensure that it will never fail as long as the U.S. government is still around, but, at the same time, is not a drain on the U.S. government’s budget year after year. It is not an institution that will ever fail.

    So, even in the event that ALL FDIC ensured banks fail, the FDIC will make sure everyone who has money below $100,000 per bank will get their money back.

  29. loganmo says:

    um its the government, cant they like just print more money?!?!

  30. RodB says:

    This is clueless (at best) journalism driven by a desire to sensationalize everything. If only the financial system worked in such a simple A -> B progression.

    If lots of banks failed and the FDIC’s “official” tally of their “funds” got low, Congress would (under the probably plausible guise of misguided public pressure) task the Federal Reserve with rescuing it.

    Everyone gets their last dime, but what would really happen (and hurt everyone long-term, and what has been happening with such moves by Congress) is that liquidity of the capital markets would be increased, and inflation would steepen even further.

    By the way, “rescuing” = “increasing liquidity” = “printing money”

  31. Trai_Dep says:

    I wish network TV would go back to covering the topics they’re competent in: White women misplaced in Third World vacation spots, celebutard mishaps and plugging whichever movie their corporate overlord’s film studio has coming out that week.
    When they try doing news, it only makes them look silly and alarmist.

  32. Bryan Price says:

    I’m ready to sit back and relive the late 1980′s that saw the savings and loan blow up in Ohio. And I helped! That is, I helped fix it. Got the State of Ohio actually using things like portable computers and networks.

  33. Subliminal0182 says:

    A few friends of mine made F.D.I.C. magnets, hung them on the side and back of a Tahoe (black tinted windows for full effect), drove around town in the middle of the day and occasionally parked in competitor banks’ parking lots. The look on everybody’s face was priceless.

    Ahh free time…

  34. marsneedsrabbits says:

    This site (BankRate) rates banks, and credit unions: [www.bankrate.com] for free.

    Our credit union scored high, which is reassuring.

  35. sonneillon says:

    During the savings and loan problem during the 1980s the FDIC did run out of money, but the government just printed more to cover the deposits only exacerbating the inflation, but it was necessary.

    • stevejust says:

      @sonneillon: Again, for the second time, I am going to note the FDIC did not ensure S&Ls.

      You’re thinking of the FSLIC & the FHLBB. The FSLIC is now known as the SAIF. And of course, then the Resolution Trust Corporation that was created to deal with the mess.

      Of the $160 billion dollars for the bailout, $124 billion came from taxpayers. Much of it was borrowed by the government at interest, so that we’re still paying for it today. The real cost of the bailout in terms of what we as tax payers paid was probably more like $500 billion if you accounted for the interest.

  36. Brazell says:

    In other news breaking news from ABC, Water is Wet! Yes, if enough banks fail the FDIC could run out of money, like if an overwhelming majority of giant banks fail … which isn’t happening and won’t happen. We’re so crazy. I seriously wonder what the articles would read if we were in the midst of an actual recession.

    BEAR STEARNS DOWNFALL COULD FORCE YOU TO LIGHT HOUSE ON FIRE!

  37. cordeduroi says:

    I thought I remembered from grade school social studies that the Fed backs up FDIC insurance? No?

    Maybe this doesn’t seem like a huge deal to me because I’ve never heard of *anybody* needing to resort to FDIC to get their money back. Obviously FDIC doesn’t carry enough cash to cover every single account of every single bank in the US. If runs occured on that scale, the FDIC would be the least of our worries…

  38. Ben Popken says:

    I will disagree with my esteemed colleague Meghann Marco and say that the FDIC does indeed have access to an unlimited supply of money…they just walk into the next room and print some more.