Tuesday, October 27, 2009

Will US Bank Closures Bankrupt the FDIC?

As American bank closures now reached the 100 mark, will this eventually bankrupt the Federal Deposit Insurance Corporation?

By: Ringo Bones

As bank after bank in the US are forced to close after stress-test failure compliance which at currently at the 100 mark is the most it had been since the fallout of the Savings & Loan scandal of 1989. But will this eventually lead to the bankruptcy and / or collapse of the Federal Deposit Insurance Corporation or FDIC? After all, if the FDIC gets its funding from the American taxpayer, it can never run out of money because it has always relied on revenues collected from taxes, right?

The Federal Deposit Insurance Corporation (FDIC) began life in January 1934 as part of President Franklin D. Roosevelt’s “New Deal” to make bank deposits – especially savings accounts – as secure as the US Government itself. Banks might and could still fail but depositors will never be left high and dry. All US banks, whether or not they are members of the Federal Reserve System, are eligible for deposit insurance if they meet the FDIC requirements usually by submitting to FDIC examinations and pay an annual assessment based on their total deposits. Virtually all of the American banks now participate in this system of deposit insurance.

Before a new bank can begin operations, it must satisfy the chartering authority on certain essentials. There must be a legitimate need for the bank’s services, it must be adequately capitalized, and it must be under competent management. Banks may not later open branches or change its capital structure without approval by the proper authority. And banks are required to submit regular reports on their condition. Banks are not allowed to pay interest on demand deposits, and the maximum rate it may pay on time deposits are set by the FDIC. It may not underwrite, that is, buy for resale or distribution, security issues other than those of the federal or state governments or their agencies. The bank must maintain reserves against its depositors equal to a specific percentage of its deposits. It may not continue operation if its capital has been impaired. If the book value of the stock (the capital and surplus in back of it) is below the par value, stockholders must pay an assessment to wipe out the deficiency or the bank will be closed.

The elaborately detailed control of banks today – that eventually lead to the rise of the Basel Accord / Basel II regulations about how much capital banks need to mitigate financial and operational risks – gives banking management less room than it once had for the exercise of its own discretion. But these regulations – that date back after the great economist John Maynard Keynes and his team was consulted by President Roosevelt in formulating a “New Deal” – have made an important contribution to the sound condition of modern commercial banking.

The recent American economic crisis has been largely defined by large financial institutions that are supposedly too big to fail that are taking excessive financial risk. Unfortunately, when they eventually – and do – fail, they take usually a number of smaller banks down with them. Thus causing the FDIC to provide pay outs to bank savings account holders. Even though the FDIC only has to pay up to a maximum set account, given the number of bank failures – now and in the near future – this could reach in the hundreds of billions of dollars. Given that American financial firms had always been too profitable thanks to the overly-generous US Government subsidies provided to them from the time when Ronald Reagan ruled the free world, will these financial institutions be always taking excessive financial risks with scant regard of whether it might bankrupt the FDIC? After all, the American taxpayer has always been their insurance underwriter of last resort, right?

Well-formulated financial reforms and regulations – especially ones with teeth – can become harder to legislate the further we seem to move away from the current crisis and into the “apparent (?)” state of economic recovery. Although recently the DOW reaching above 10,000 points is by no means an irrefutable indicator of true economic recovery. As some American financial institutions that are recently bailed out by American taxpayer money readily returned to they’re previous status quo of excessive executive bonuses and risk taking. Especially as the big fat profits slowly rolled in. Most of us will probably be asking who are these financial institutions responsible to - The companies’ shareholders or the state? Given that the US Government is now for all intents and purposes beholden to Chinese bond holders thanks to the Bush-Cheney consortium’s policy of using Chinese money to buy Arab crude oil, legislating effective financial regulations will now be at the whim and whimsy of corporation-owned lobbyists of Capitol Hill.

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