It’s only a matter of time before the FDIC will have to tap its Uncle Sam lifeline.
1) In the second quarter, FDIC problem banks spiked 36% and now represent $300 billion in assets. In contrast, the FDIC’s own fund balance dropped 20% to $10.4 billion. Such a divergence shows the extent of the FDIC’s problem.
2) The FDIC’s fund balance versus insured deposits stood at just 0.22% in 2Q.
3) In addition, the banking industry itself didn’t look too good either. Not only did banks’ bad (noncurrent) loans rise substantially in Q2, but the coverage of their problem loans fell at the same time. Thus banks only had 63.5 cents set aside for every dollar of bad loans. While this coverage ratio stabilised versus Q1, it still remained low and was falling.
Thus it’s just a matter of time before the FDIC gets further support. In a TV interview with Fox Business Network, FDIC Chairman Sheila Bair didn’t rule out implementing a second “special assessment” (bank levy) for cash by the end of the third quarter, or in the fourth. But given the industry is struggling as is, there will be a limit to how much the FDIC can push on this front.
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