Monday, October 5, 2009

FDIC and Bank Failures

An average of 10 banks have failed per month this year, nearly four times the number that failed in 2008. It's the highest tally since 1992, when 181 banks failed. Many analysts pointed out that few banks had failed a year ago, when compared to the rout caused by the Savings & Loan implosion of 1992. But a deeper look reveals that there are fewer banks these days than then: the top three mega-banks hold nearly ten percent of all deposits.

In order to entice strong banks to pick up failed banks, the sharing of loss in a "loss agreement" has become a common, near standard, part of the purchase deal. The 25 U.S. bank failures in 2008 cost the agency $18 billion, while revenue that year was $3 billion.

In February of this year, the worsening U.S. economy prompted the Federal Deposit Insurance Corp. to double its projected U.S. bank failure costs to more than $80 billion over a five-year period ending in 2013, with $65 billion in bank failure costs expected during 2009 to 2013. At that time, the agency set aside $22 billion for expected payouts by the FDIC insurance fund for bank failures in 2009.

Friday's closures will cost FDIC $293.3 million, more than ont-tenth the amount set aside to cover fifty-two weeks. This year's failures have reduced the FDIC's insurance fund to $10.1 billion from $45 billion a year ago.

Faced with dwindling funds, the FDIC discussed how to raise money to restock the fund earlier this week. The agency proposed that banks prepay their deposit insurance premiums for the next three years.
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