FDIC fund shrinks as banks fail
Industry, agency insist deposits remain safe
WASHINGTON – The banking industry lost a total of $3.7 billion in the second quarter as the government required surviving banks to pay the bill for the cleanup of failed institutions.
The Federal Deposit Insurance Corp., which administers the government’s fund for repaying depositors at failed banks, said Thursday that the agency continued to spend more money than it collected, leaving $10.4 billion in the fund at the end of June, the smallest amount since the early 1990s.
The pace of failures has accelerated since the end of June, further draining the fund and increasing the financial pressure on surviving banks. The FDIC has signaled that it is likely to dun the industry for billions of dollars in supplemental fees later this year.
The FDIC unveiled the numbers Thursday as part of its quarterly report on the state of the industry. Chairman Sheila Bair said that banks continued to struggle even as the economy showed signs of modest improvement. The total volume of outstanding loans declined for the fourth straight quarter as banks continued to cut back on new lending, in part because existing borrowers continue to default in growing numbers.
The agency’s list of firms at risk of failing now contains 416 names, a 36 percent increase from the first quarter.
“These credit problems will outlast the recession by at least a couple of quarters,” Bair said.
Both the industry and the agency were at pains to underscore that the dwindling balance of the FDIC fund does not threaten the safety of bank deposits.
The FDIC already has reserved $32 billion to cover expected failures over the next year. The $10.4 billion balance reported Thursday is the amount the agency holds in addition to that reserve.
The agency also can borrow money from Treasury to pay depositors.
The real impact of the dwindling balance is on the industry itself. The agency collected $11.7 billion from the industry during the first half of the year, sapping money that otherwise might have supported new lending. That is already more than four times the total amount the FDIC collected from the industry last year.