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Published: Thursday, 8/27/2009

FDIC insurance fund down 20 percent in 2nd quarter

ASSOCIATED PRESS

WASHINGTON The agency that guarantees bank deposits said Thursday there are no immediate plans to borrow money from the government to bolster its insurance fund, which has shrunk under the weight of collapsing banks.

The fund fell 20 percent to $10.4 billion in the second quarter as U.S. banks overall lost $3.7 billion, the Federal Deposit Insurance Corp. said. That s the fund s lowest point since 1992 at the height of the savings-and-loan crisis. Some analysts have warned that the fund could fall below zero by year s end.

The FDIC estimates bank failures will cost the fund around $70 billion through 2013. It s slipped to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent.

Asked about a possibility of tapping the Treasury, FDIC Chairman Sheila Bair said: Not at this point in time. I never say never, but not at this point in time, no.

At the same time, Bair reaffirmed the likelihood of an additional fee on U.S. banks this year to help replenish the fund.

Despite the shrinking insurance fund, customers have nothing to worry about. The FDIC is fully backed by the government, which means depositors money is guaranteed up to $250,000 per account. And the agency still has billions in loss reserves apart from the insurance fund.

Still, the FDIC needs to replenish its fund. It can do so by charging banks higher fees or by taking the more radical step of borrowing from the U.S. Treasury.

It s also opened the door wider for private investors to buy failed financial institutions. The FDIC s board voted Wednesday to reduce the cash that private equity funds must maintain in banks they acquire.

Private equity funds have been criticized as excessive risk-takers. But with fewer healthy banks willing to buy ailing institutions, the banking crisis has softened the FDIC s resistance to private buyers.

Eighty-one banks have failed so far this year, and hundreds more are expected to fall in coming years because of souring loans for commercial real estate. That threatens to deplete the FDIC s fund.

No matter how challenging the environment, the FDIC has ample resources to continue protecting insured depositors as we have for the last 75 years, Bair said at a news conference. A decline in the fund balance does not diminish our ability to protect insured depositors.

The FDIC has $21.6 billion in cash available as a reserve to cover losses at failed banks, down from $25 billion at the end of the first quarter.

The agency likely wouldn t consider tapping its credit line at the Treasury Department now up to $500 billion unless that cash were depleted, said Diane Ellis, deputy director of the FDIC s division of insurance and research.

The FDIC said surging levels of soured loans at banks dragged down profits in the April-June period. The $3.7 billion loss compared with profits of $7.6 billion in the first quarter, and $4.7 billion a year ago.

The agency also said the number of banks deemed to be in trouble jumped to 416 from 305 at the end of the first quarter. That s the highest number since June 1994. Total assets of troubled institutions surged to $299.8 billion from $220 billion in the first quarter.

The FDIC said nearly 66 percent of banks and savings and loans reported earnings below those in the second quarter of 2008, and more than a quarter posted a net loss.

Banking industry performance is, as always, a lagging indicator, Bair said. The banking industry, too, can look forward to better times ahead. But for now, the difficult and necessary process of recognizing loan losses and cleaning up balance sheets continues to be reflected in the industry s bottom line.

The 8,195 federally insured banks and thrifts set aside $66.9 billion in the second quarter to cover potential loan losses, up from $60.9 billion a year earlier.

The FDIC s insurance fund has 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.

Small and midsize banks nationwide 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.



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