Tuesday, December 14, 2010

Even with a Higher Premium, FDIC May Take Long Time to Build Up Reserves

HEARD ON THE STREET

DECEMBER 15, 2010

FDIC Fund Is in for a Long Wait

By DAVID REILLY, Wall Street Journal

Let's hope that the next financial crisis is 17 years away. That's how long the Federal Deposit Insurance Corp. estimates it will take before its deposit-insurance fund is close to fighting fit.

That's based on a rule approved Tuesday by the FDIC's board that sets a new, higher target reserve level for the fund, 2% of insured deposits.

Previously, the level was capped at 1.5%. That and other funding limitations left the insurance fund unprepared for the financial crisis, which led to the failure of 315 institutions. As a result, the fund was $8 billion in the red as of Sept. 30, even as there are 860 institutions on the agency's problem-bank list.

That explains the need for a higher reserve level. But 2%, which would be about $108 billion based on deposits of about $5.4 trillion, doesn't cut it.

The FDIC itself noted in its rule that a 2% level prior to past crises "would barely have prevented the fund from becoming negative." The point of the reserve is to keep that from happening. And the agency's analysis didn't include the possible failure of too-big-to-fail banks bailed out by the government last time around.

The FDIC's statements imply the level should be higher than 2%. Banks wanted it lower to avoid paying higher fees. The final result is a poor compromise. For too long, banks, especially the biggest ones, have paid too little for FDIC insurance. This needs to change, the quicker the better.

Write to David Reilly at david.reilly@wsj.com