At what cost will this have to the economy?
It’s one statement that almost everyone has seen it coming. The Federal Deposit Insurance Chair Sheila Bair announced in CBS that the agency will be in need of more funds now that the deposit insurance fund is at its lowest level. According to Time Magazine, “Just 2 1/2 months into the year, 17 federally insured banks have failed. The FDIC believes U.S. bank failures will cost the deposit insurance fund more than $65 billion over the next four years. The FDIC insures bank accounts for up to $250,000.”
There are two things that need to be stressed here.
First, there’s absolutely no choice for the Congress but to allot more funds for the FDIC once its budget reaches a critical level. In other words, Bair is not warning us but instead, she’s telling us ahead of what will transpire in her office. We expect this to happen before the year ends once more banks that fail reach 30 for this year alone.
Second, the industry-funded reserves will dry up by a faster rate not just because of the crisis but also due to the increased coverage per depositor. Insured deposits cost the agency a significant cut in its funds when bank failures become rampant.