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FDIC funds critically low as bank failures rise

NEW YORK — The Federal Deposit Insurance Corp., the agency that guarantees you won't lose your money in a bank failure, may need a lifeline of its own.

The coffers of the FDIC have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest.

The agency figures it will need $70 billion to cover bank failures through 2013, more than five times the $13 billion that was in the fund in March. The last time it was that low was during the S&L crisis in 1992, when the fund was down to $178 million.

So far this year, 81 banks have failed, compared with just 25 last year — and only three in 2007. Hundreds more banks are expected to fall in coming years because of souring loans for commercial real estate. That threatens to deplete the FDIC's fund.

Last week's failure of Guaranty Bank in Texas, the second largest this year, is expected to cost the FDIC $3 billion. The FDIC recorded more than $19 billion in losses just through March.

The agency will reveal today how much is left in its reserves. FDIC Chairwoman Sheila Bair may also use the quarterly briefing to say how the agency plans to shore up its accounts.

Small and mid-sized banks across the country have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don't lose a cent.

It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.

None of this means bank customers have anything to worry about. The FDIC is fully backed by the government, which means depositors' accounts are guaranteed up to $250,000 per account. And it still has billions in loss reserves apart from the insurance fund.

Bair will also update the number of banks on the FDIC's list of troubled institutions today. That number shot up to 305 in the first quarter — the highest since 1994 and up from 252 late last year.

Because of the surging bank failures, the FDIC's board voted Wednesday to make it easier for private investors to buy failed financial institutions.

Private-equity funds have been criticized for taking too many risks and paying managers too much. But these days, fewer healthy banks are willing to buy ailing banks, and the depth of the banking crisis appears to have softened the FDIC's resistance to private buyers.

Under the new rules, a buyer would need to maintain the failed bank's reserves at levels equal to 10 percent of its assets. An earlier proposal set the requirement at 15 percent.

The new policy also eases the rules on when private investors must maintain minimum levels of capital that might be needed to bolster banks they own.

But the FDIC sought to guard against private-equity funds that might want to quickly buy and sell at a profit: It required the investors to maintain a bank's minimum capital levels for three years.

At least in theory, allowing private investors to buy failing banks would mean the FDIC could charge a higher price, shrinking the amount of losses the agency would have to cover.

Some critics say regulators have taken too long to shut down troubled banks. Chicago's Corus Bankshares, for example, has staggered for weeks under the weight of bad real estate loans.

FDIC spokesman Andrew Gray said the agency seeks to strike a balance between helping troubled banks work through their problems "so there's zero cost to the deposit fund," and intervening quickly if there are no other options.

FDIC funds critically low as bank failures rise 08/26/09 [Last modified: Wednesday, August 26, 2009 9:33pm]
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