Worsening Bank Loans And The Underfunded FDIC

The Big Picture reports that bank loans are worsening.

(emphasis mine)

Worsening Bank Loans
By Barry Ritholtz - May 30th, 2009, 7:32AM

Floyd Norris on the bad — and worsening — loan problem:

"OVERALL loan quality at American banks is the worst in at least a quarter century, and the quality of loans is deteriorating at the fastest pace ever, according to statistics released this week by the Federal Deposit Insurance Corporation.

The report highlighted that even as the government and major banks have scrambled to deal with the impaired securities the banks own, the institutions have been plagued by an unprecedented volume of old-fashioned loans going bad.

Of the entire book of loans and leases at all banks — totaling $7.7 trillion at the end of March — 7.75 percent were showing some sign of distress, the F.D.I.C. reported. That was up from 6.9 percent at the end of 2008 and from 4.1 percent a year earlier. It also exceeded the previous high of 7.26 percent set in 1990 and 1991, during the last crisis in American banking. (The F.D.I.C. has been collecting the figures since 1984)."

The chart says it all:

graphic courtesy of NYT

The Market Pipeline reports that the FDIC is facing financial problems.

Friday, April 24, 2009
FDIC, the 'F' stands for...

Well, it's not 'funding', anyway.

While the financial problems facing the Federal Deposit Insurance Corporation (FDIC) have been apparent for some time, this chart is still striking.

That's the Deposit Insurance Fund Reserve ratio released on Wednesday in FDIC's Q4 2008 banking profile. It fell 36 basis points to 0.40 per cent in the period, the lowest since June 30, 1993 when it was 0.28 per cent. But, as we noted before
the Q4 2008 ratio doesn't cover the extra liabilities from the US government's Autumn 2008 move to boost the FDIC insurance limit from $100,000 to $250,000 per depositor per bank.

Here's the footnote from page 16 of the report:

The Emergency Economic Stabilization Act of 2008 directs the FDIC not to consider the temporary coverage increase to $250,000 in setting assessments. Therefore, we do not include the additional insured deposits in calculating the fund reserve ratio, which guides our assessment planning. If Congress were to decide to leave the $250,000 coverage level in place indefinitely, however, it would be necessary to account for the increase in insured deposits to determine the appropriate level of the fund.

Including the additional liabilities of the $250,000 level would probably make that reserve ratio go much lower — possibly even into negative territory.

While FDIC won't go bankrupt (the US Treasury will recapitalise it) the meagreness of that reserve ratio in the face of what are likely to be significantly more bank failures this year, suggests
the organisation is underfunded and will require additional capital at some point. FDIC's borrowing authority from the US Treasury was limited at $30bn, but that's since been uncapped as part of, you guessed it, the Emergency Economic Stabilization Act.

My reaction: This is just a quick entry to point out that bank loans are worsening and the FDIC is horribly underfunded.

Oh, while I am at it, remember deposit reclassification? Not only does it allow banks to lower their required reserves to zero, it also allows them to underpay on FDIC insurance premiums by understating their clients' retail checking account balances. Isn't financial engineering wonderful?

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