For 10 years—including the boom times banks enjoyed in the first half of this decade—the FDIC was prevented from collecting fees from 95% of financial institutions, which it would have used to further build up its safety net in the event it would someday have to bail out a bunch of stupid losers who confused banking with alchemy.

Cornelius Hurley, director of the Boston University law school’s Morin Center for Banking and Financial Law, told the Boston Globe that if the FDIC has to take over a large bank—say, Citibank—the funds that remain would be drained “in a flash.”

“Typically you would build up a reserve during the halcyon days to protect yourselves during a recession,” he said, calling the decision to stop collecting most premiums “a political one” that was pushed by banks and not based on strict accounting principles.

Of course the American Banking Association says it made no sense to pay into the FDIC during those 10 years because they had more than enough money. Congress, not surprisingly, agreed with them.

But James Chessen, chief economist of the American Bankers Association, said that it made sense at the time to stop collecting most premiums because “the fund became so large that interest income on the fund was covering the premiums for almost a decade.” There were relatively few bank failures and no projection of the current economic collapse, he said.

“Obviously hindsight is 20-20,” Chessen said.

House Financial Services Committee chairman Barney Frank agreed that officials believed at the time that the good times would last and that bank failures would not be a problem.

“We had this period where we had no failures,” the Massachusetts Democrat said in an interview yesterday. “The banks were saying, ‘Don’t charge us anything.'”

At the end of 2008, the FDIC’s insurance fund ratio was 0.40% of all insured deposits, far below the minimum 1.15% mandated by Congress.

“Now-needy FDIC collected little in premiums” [Boston Globe] (Thanks to Karl!)
(Photo: gruntzooki)

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