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Opinion

US bank failures: FDIC in a fix

Sheila Bair is running short of funds. But she is right to want to raise them in a way that doesn’t create a panic.

There seems to be a growing panic at the Federal Deposit Insurance Corporation as the number of US bank failures increases and the deposit insurance fund becomes depleted. At the end of September, FDIC proposed that institutions be required to prepay their quarterly risk-based assessments for the next three years, starting in the fourth quarter of 2009. The move would bring in about $45 billion. At the end of June the fund was down to just $10 billion yet FDIC estimates losses of more than $70 billion during the next five years as bank collapses increase. Ninety-five banks in the US have failed this year.

The proposal by FDIC chair Sheila Bair has been slammed as adding to the woes of the smaller banks – the argument being that they will not be able to afford the premiums and will end up going out of business and depleting the FDIC’s insurance fund yet further. But most small banks claim that they can afford the premium payments and are happy to make them. Someone has to pay, and the last thing they need is depositors panicking and taking their money out. The proposal also includes a provision that enables the banks to allow the prepayments not to have an impact on earnings initially.

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