FDIC Appears Strapped For CashMay Cloak Trouble
Only in this topsy-turvy credit crisis can this make sense: The Federal Deposit Insurance Corp.'s fund is running low.
The FDIC's proposed solution for its funding problem? To more than double the amount it is willing to insure each bank depositor, to $250,000.
The idea, as explained by Karen Garrett, a partner in law firm Bryan Cave's banking practice, is that raising insured deposits to $250,000 from $100,000 would give depositors more comfort that their money is safe. That would prevent runs on banks. Fewer bank runs would mean the FDIC wouldn't have to reach deep into its fund to insure more banks. "The point is just to calm people down," Ms. Garrett said.
Is the FDIC paying now for keeping premiums low between 2004 and 2007? "If there's a question, it should be whether a bigger fund shouldn't have been built up as we headed into this crisis," said Ms. Garrett. "This didn't just happen overnight for them." The FDIC could make up for it now with the Senate's plan to provide the agency with unlimited temporary funding from the Treasury.
John Douglas, a former FDIC general counsel who is a partner with law firm Paul Hastings, Janofsky & Walker, opposes increasing the FDIC's deposit cap. "I think it increases the risk of the deposit insurance fund at a time when it's not particularly healthy," he said. In addition, he argued, keeping the cap at $100,000 encourages market discipline among the banks. Customers will flee a bank that is struggling, which is a sign the FDIC should be concerned about that bank.
By raising the cap, it will take more time to see the signals of distress, and federal regulators, as well as customers, may be caught unaware by a failing bank, Mr. Douglas said.
By: Heidi Moore
Wall Street Journal; October 2, 2008
