The Federal Deposit Insurance Corp may need to borrow from the US Treasury to replenish its deposit insurance fund, Chairman Sheila Bair said after a speech in Washington DC today.
The FDIC is supposed to be able to “pay for itself” through assessments on insured banks. But with 92 banks having failed so far this year, the fund is in need of its own capital injection. As it turns out, the FDIC was also undercapitalized and dependent on good times to remain flush.
The proper thing to do would probably have been to increase bank assessments during good times to build up a healthy fund. But as with bank reserve requirements, no one thought of adopting a counter-cyclical policy until it was too late.
Now the FDIC is threatening to increase assessments, or even force banks to prepay future assessments. But this is difficult to do while bank lending remains anemic and banks face serious capital constrains.
“Ms. Bair appeared cautious about resorting to the Treasury credit line, saying there are different views on when it should be used. She said some believe it should be reserved for emergencies only, rather than for covering losses that are already known,” the Wall Street Journal reports.