What Works About the FDIC?
reads Ezra Klein and Matt Yglesias (between the two of them they have more years than I do).
Klein thinks the FDIC works well. Yglesias notes that it keeps eating banks every Friday and has doubts about the quality of its prudential regulation. I will argue that the FDIC has more of an incentive to make banks prudent than the SEC, the Fed, the Treasury or the comptroller of the currency.
The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.
Robert Waldmann
The SEC and the comptroller don’t put their own money on the line. They regulate but they don’t bail out. Failures mean they have more egg on their face but no less cash on hand. The Treasury has broad responsibilities and has to explain economic policy to Congress in any case. The FED can just print all the money it wants. The FDIC is independent so long as it stays within its means.
This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.
See the secret is to have an intertemporal budget constraint. That tends to cause forward looking behavior.
Robert:
It would have been nice if the OTS had chosen to regulate rather than do this:
http://afraser.com/crisis_html_m2227a2c1.png
But then what would we be doing differently today without the likes of AIG Financial Products, Countrywide, IndyMac, etc. having failed? Maybe a little over regulation of the institutions would be nice since we have a lack of transparency of derivatives.
Problem is that the vast majority of US banks apparently were driven out of the dumb residential real estate investment game by the big guys. Therefore they had to find a different set of bad investments — largely in Commercial Real Estate. These loans are going bad slowly, but steadily. I wish I could say that a recovering economy will bail them out, but it’s hard to believe that will happen any time soon. Banks are failing slowly, but surely.
The FDIC raised its insurance rates in 2009 and has stretched the time projected to get its trust fund back to the statutory minimum out to eight years. Depending on bank failure rates, and how successful the FDIC is in finding buyers to take over failing banks without too much trust fund money being expended, the FDIC apparently might run out of money this year and require cash from Congrress. http://www.fdic.gov/news/board/Sept29no1.pdf If not this year, maybe next?
Oddly, I can’t find any neat charts showing when the FDIC is likely to run out of cash.
FWIW, Calculated Risk is predicting that the FDIC’s problem bank list might well expand from 600 to 1000 by the end of the year. http://www.calculatedriskblog.com/2010/03/growth-of-problem-banks-unofficial.html
Robert Waldmann – “The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.”
…”The FDIC is independent so long as it stays within its means.”
“This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.”
You don’t appear to know what is going on.
The FDIC Deposit Insurance Fund is in negative balance.
The only thing propping up the FDIC is the special assessment (pay forward) and two sources of external financing that FDIC can tap.
FDIC DIF (Deposit Insurance Fund)
Historical Trends – As of December 31, 2009
http://www.fdic.gov/bank/statistical/stats/2009dec/FDIC.html
End of Calendar Year
Fund Balance
2006: $ 50.2 billion
2007: $ 52.4 billion
2008 $ 17.3 billion
2009: $ – 20.9 billion
Reserve Ratio %
2006: $ 1.21%
2007: $ 1.22%
2008 $ 0.36%
2009: $ – 0.39%
.
Robert Waldmann – “The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.”
“The FDIC is independent so long as it stays within its means.”
“This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.”
You don’t appear to know what is going on.
The FDIC Deposit Insurance Fund is in negative balance.
The only things propping up the FDIC is the special assessment (pay forward) and two sources of external financing that FDIC can tap, and also FDIC’s recent aggressive sale of assets.
FDIC DIF (Deposit Insurance Fund)
Historical Trends – As of December 31, 2009
http://www.fdic.gov/bank/statistical/stats/2009dec/FDIC.html
End of Calendar Year
Fund Balance
2006: $ 50.2 billion
2007: $ 52.4 billion
2008 $ 17.3 billion
2009: $ – 20.9 billion
Reserve Ratio %
2006: $ 1.21%
2007: $ 1.22%
2008 $ 0.36%
2009: $ – 0.39%
.
Robert Waldmann – “The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.”
“The FDIC is independent so long as it stays within its means.”
“This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.”
You don’t appear to know what is going on.
The FDIC Deposit Insurance Fund (DIF) is in negative balance.
The only things propping up the FDIC are the special assessment (pay forward), two available sources of external financing that FDIC can tap, and FDIC’s recent aggressive sale of assets.
FDIC DIF (Deposit Insurance Fund)
Historical Trends – As of December 31, 2009
http://www.fdic.gov/bank/statistical/stats/2009dec/FDIC.html
End of Calendar Year
Fund Balance
2006: $ 50.2 billion
2007: $ 52.4 billion
2008 $ 17.3 billion
2009: $ – 20.9 billion
Reserve Ratio %
2006: $ 1.21%
2007: $ 1.22%
2008 $ 0.36%
2009: $ – 0.39%
.
Robert Waldmann – “The key point is that the FDIC has a trust fund and wants to keep it. This is the reason that Stiglitz, Sachs, and Krugman were totally wrong and the PPIP was not a huge give away (Tom Bozzo and I explained it to them at the time but they don’t read this blog). So long as the FDIC doesn’t run out of money, it doesn’t have to go begging to Congress.”
…”The FDIC is independent so long as it stays within its means.”
“This makes a difference. It is true that the FDIC has had to spend some of its money lately. IIRC it hasn’t had to ask congress for any extra appropriations – at all. This in spite of the fact that the FDIC agreed to insure money market funds which therefore got insurance without paying for it. The scale of failures of FDIC insured institutions are tiny compared to the scale of failures of non FDIC insured institutions.”
You don’t appear to know what is going on.
The FDIC Deposit Insurance Fund is in negative balance.
The only things propping up the FDIC are the special assessment (pay forward), two available sources of external financing that FDIC can tap, FDIC’s recent aggressive sale of assets, and, last but not least, Congressional authority above that presently authorized to Treasury.
FDIC DIF (Deposit Insurance Fund)
Historical Trends – As of December 31, 2009
http://www.fdic.gov/bank/statistical/stats/2009dec/FDIC.html
End of Calendar Year
Fund Balance
2006: $ 50.2 billion
2007: $ 52.4 billion
2008 $ 17.3 billion
2009: $ – 20.9 billion
Reserve Ratio %
2006: $ 1.21%
2007: $ 1.22%
2008 $ 0.36%
2009: $ – 0.39%
.
OK so the FDIC has lost it’s independence (my info was out of date). But see that hurts. Tends to encourage caution.
Somewhat OT I was surprised to learn about a small local Credit Union here in Austin that announced it was considering switching from federal deposit insurance to private deposit insurance. The credit union version of the FDIC had raised the premiums and they asked the member/owners to ratify the decision to switch to private deposit insurance.
I was wondering what this meant wrt regulation of the institution and also whether this was something happening in other places or just this local credit union (Velocity CU). They were lobbying their members to support the switch than suddenly abandoned the plan when it turned out the private insurer was raising their premiums too so no longer represented any cost savings.
Anybody else hear of any similar moves towards private deposit insurance at other institutions?
While the insuring of banks may be working, that doesn’t mean it’s good for America, given that the FDIC is empty of funds so it’s all paid for by taxpayers.
RW,
Agree completely, but my agreement is an unreliable measure of the quality or correctness of your argument. I simply thought the same thing when I saw the FDIC raised as the best of breed financial regulator.
It is, however, a nice story about incentives. We know that incentives, structure and culture all matter. We also know that regulatory capture tends to go to work on incentives right away, and lead to a deterioration in culture, as well. Poor structure doesn’t stand a chance all alone.
Much of the debate about re-regulation has been about structure. It matters, but should not be the only focus, or the central focus to the point that the others are neglected. There may have been a time in the golden past when reputation was sufficient incentive to do well, but these days, reputation seems to have been turned on its head. “If I sell my soul to Big Finance, Big Coal, Big Oil, Big Blah, Blah, then I will be able to move on to a board/lobbying/AEI job.”
Those interested in tracking what is unfolding at the FDIC may find these links useful:
FDIC Press Releases
http://www.fdic.gov/news/news/press/index.html
FDIC Annual Reports
http://www.fdic.gov/about/strategic/report/index.html
Deposit Insurance Fund (DIF) Management
http://www.fdic.gov/deposit/insurance/fund.html
Statistics At A Glance
http://www2.fdic.gov/qbp/qbpSelect.asp?menuItem=STAT
FDIC Failed Bank List
http://www.fdic.gov/bank/individual/failed/banklist.html
FDIC Bank Failures in Brief
http://www.fdic.gov/bank/historical/bank/index.html
.
Key documents:
MEMORANDUM TO: The Board of Directors
FROM: Arthur J. Murton
Director, Division of Insurance and Research, FDIC
SUBJECT: Special Assessment, Restoration Plan and Proposal for
Maintaining Fund Liquidity
September 28, 2009
http://www.fdic.gov/news/board/Sept29no1.pdf
Banks Tapped to Bolster FDIC Resources
FDIC Board Approves Proposed Rule to Seek Prepayment of Assessments
September 29, 2009
http://www.fdic.gov/news/news/press/2009/pr09178.html
FDIC Board Approves Final Rule on Prepaid Assessments
November 12, 2009
http://www.fdic.gov/news/news/press/2009/pr09203.html
FDIC-Insured Institutions Report Earnings of $914 Million in the Fourth Quarter of 2009
Full-Year Net Income Totaled $12.5 Billion
February 23, 2010
http://www.fdic.gov/news/news/press/2010/pr10036.html
*VtCodger already cited the first document.
Robert,
I see no evidence that FDIC has lost its independence or courage.
It would appear that the member banks’ prepay assessment (roughly $46 billion, end of 2009) has afforded FDIC the ability to avoid requesting authorized backup funding from Treasury. FDIC Chairman Chairman Sheila Bair has made a big deal of not tapping Treasury funding. If anything has changed on that front, it’s news to me. But that funding support is still available if needed.
There is a difference between focusing solely on the FDIC’s Deposit Insurance Fund (DIF) balance and analyzing the FDIC’s cash and marketable securities position ($66 billion, end of 2009) which includes the contingent loss reserve ($44 billion).
This FDIC news release covers the situation reasonably well:
FDIC-Insured Institutions Report Earnings of $914 Million in the Fourth Quarter of 2009
Full-Year Net Income Totaled $12.5 Billion
FDIC
February 23, 2010
http://www.fdic.gov/news/news/press/2010/pr10036.html
.
Here is an interesting if not troubling development.
Note the difference in commentary regarding the same FDIC-Industry meeting:
FDIC Holds Roundtable With Private Investors of Failing Banks
March 23, 2010, FDIC
http://www.fdic.gov/news/news/press/2010/pr10063.html
US FDIC meets with private equity industry officials on failed bank deals
Tue Mar 23, 2010, Reuters
http://www.reuters.com/article/idUSN2310332120100323
“In the 24 months between September 2007, the beginning of the bank capital-raising cycle, and August 26, 2009, when the FDIC Policy announced its final statement, private equity investment in insured depository institutions averaged $895 million per month, the council said.”
“In the six months following the FDIC Policy Statement, investment has averaged $58 million per month, a 94 percent decline, it said.”
Roundup: The bad news
FDIC FAILED BANKS
FDIC Failed Bank List
http://www.fdic.gov/bank/individual/failed/banklist.html
FDIC Bank Failures in Brief
http://www.fdic.gov/bank/historical/bank/index.html
Tracking the Nation’s Bank Failures
March 29, 2010, WSJ
http://blogs.wsj.com/deals/2010/03/29/tracking-bank-failures-bair-expects-2010s-total-to-top-last-years/
and
http://s.wsj.net/public/resources/documents/info-Failed_Banks-sort.html
Failed bank list
Updated March 27, 2010, Banktracker
http://banktracker.msnbc.msn.com/stories/2010/mar/27/failed-bank-list/
List of banks under stress keeps growing
March. 10, 2010, MSNBC
http://www.msnbc.msn.com/id/35754096/
.
Here are a few other FIDC news stories of interest:
‘On the Edge’ Banks Face Writedowns on FDIC Auctions (Update1)
March 08, 2010,
http://www.businessweek.com/news/2010-03-08/-on-the-edge-banks-face-writedowns-on-fdic-auctions-correct-.html
FDIC’s $1.37 bln sale draws strong demand
Wed Mar 10, 2010
http://www.reuters.com/article/idUSN1015851420100310
FDIC’s $653 mln structured guaranteed notes launched
Wed Mar 24, 2010
http://www.reuters.com/article/idUSN2415278920100324?type=marketsNews
FDIC Reduces Loss Guarantees for Failed Bank Buyers (Update1)
March 26, 2010
http://www.businessweek.com/news/2010-03-26/fdic-reduces-loss-guarantees-for-acquirers-of-failed-u-s-banks.html
New head named for FDIC in Atlanta
March 26, 2010
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=ACBJ&date=20100326&id=11324943
.
VtCodger – “Depending on bank failure rates, and how successful the FDIC is in finding buyers to take over failing banks without too much trust fund money being expended, the FDIC apparently might run out of money this year and require cash from Congrress.”
It is unlikely that FDIC will need to request further assistance from Congress. Treasury already has authority to float $100 billion to FDIC and, as far as I know, FDIC has not tapped that backup funding. FDIC has another source for backup funding that it will probably tap before Chairman Shelia Bair is willing to touch Treasury funding.
The FDIC’s contingent loss reserve may cover FDIC’s funding needs for 2010 and 2011. There was $44 billion is that reserve at the end of 2009. And FDIC had another $22 billion in cash and marketable securities.
Note the aggressive sales that FDIC has generated recently. They’re pushing it. See the links downthread.
The insuring of banks is one of the smartest actions ever undertaken in the USA.
FDIC hasn’t borrowed any funding from U.S. taxpayers to my knowledge.
FWIW, the FDIC generally announces bank failures on Friday. Calculated Risk http://www.calculatedriskblog.com usually has one or more articles on bank failures, updates to a scrollable problem banks list, etc on Friday and maybe Saturday. There are some troubling trends — particularly the steadily growing size of the list of the problem banks despite the regular removal of three or so banks a week by failure.
in addition, there are fewer and fewer banks willing to take the assets from failed banks (even though the fdic chips in quite a lot of money). and it is almost impossible for entities which are not banks to do so.
oh, and the way things have been going, the likely result of a robust PPIP would have been a huge windfall for the treasury.