FDIC Running On Empty

The FDIC better decide what they are going to do soon, the insurance fund is running on fumes. The $100 billion credit line with Treasury will need to be tapped. The real question: Is $100 billion enough?-Lou

FDIC to consider ways to replenish deposit fund

WASHINGTON (Reuters) - U.S. bank regulators are considering tapping a line of credit with the U.S. Treasury Department and may explore other lesser-known options to replenish the dwindling fund that safeguards bank deposits.

Federal Deposit Insurance Corp Chairman Sheila Bair said on Friday that the agency would meet at the end of the month to discuss options to rebuild the fund, which has been significantly drained by a sharp increase in bank failures.

"We are carefully considering all our options, including borrowing from Treasury," Bair said, referring to the agency's $500-billion line of credit with the Treasury Department. She was speaking at a global finance conference in Washington.

But regulators are still reluctant to tap the line of credit because they want to avoid temporarily using taxpayer money to clean up the banking mess, she said.

Bair said the FDIC also had lesser-known alternatives for replenishing the fund, such as prepayments of assessments on banks and issuing a note. She did not give further details on those options.

Other options include more special assessments on banks. The FDIC has already charged the industry one emergency fee of $5.6 billion this year, and is authorized to levy two more.

Bair said the FDIC would seek comment on these options before making a final decision.

So far this year, 92 U.S. banks have failed, compared with 25 during all of last year and only three in 2007. Those failures have whittled the balance of the insurance fund down to $10.4 billion from $45 billion a year ago. The FDIC is careful to note that it has $42 billion in reserves to handle failures over the next year.

"There are a few options available to the fund - none of them very palatable," said Brian Olasov, a managing director with McKenna, Long & Aldridge in Atlanta. He said the long-term solution to replenish the fund will be higher quarterly assessments.

MARK-TO-MARKET

Bair's comments touched on a range of topics, from her view that regulators should not have the option of extending "open-bank assistance" to troubled financial firms, to her concerns about accounting proposals that could imperil banks in times of stress.

She said she generally agrees with actions by the Financial Accounting Standards Board but is worried about a proposal to further extend "mark-to-market" accounting to bank loans.

"During periods of market stress, losses could be exacerbated," Bair said. "We don't need to deepen the crises."

FASB met last month to discuss whether to force companies to value nearly all financial instruments on their balance sheets, including loans, at market value, and to reflect them in earnings. Banks oppose such a change. FASB is expected to release a proposal in the first half of 2010

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