Now The FDIC Is Getting Bailed Out Too!

There’s been quite a lot of talk lately that the Federal Deposit Insurance Corp might need a bailout itself. Now it looks like it is going to get it.

Senate Banking Committee Chairman Christopher Dodd wants to allow the FDIC to borrow as much as $500 billion from The People’s Republic of China the Treasury Department.

The FDIC is supposed to be a self-funded deposit insurance fund. At the end of 2008, it had $19 billion on hand. That reserve may not be enough, however, to deal with two pressures bearing down on the FDIC. On one side, the size of deposits that are insured has grown from $100,000 to $250,000, in an effort to stop big depositors from withdrawing cash. On the other side, many more banks are in danger of failing and needing to draw on the insurance to provide funds to depositors. The FDIC’s "Problem List" grew during the fourth quarter of last year from 171 to 252 institutions, the largest number since the middle of 1995. Total assets of problem institutions increased from $115.6 billion to $159 billion.

The FDIC wanted to raise fees on banks to build up the insurance fund but this may not be possible. The banks are already on lifelines from the Treasury’s TARP. Higher FDIC fees could just have them scampering back to the Treasury for more money. In a sense, this would be a bit ridiculous. The government (Treasury) hands banks money, which then give it back to the government (FDIC), which then gives it back to failing banks.

Dodd’s bill cuts out a step in the process. It is, nonetheless, another bailout of banks, which would ordinarily have to pay for the increased demands on the FDIC’s insurance fund. Ben Bernanke, Sheila Bair and Tim Geithner have all urged this move.

Twenty five banks failed in 2008. In the first two months of this year, 16 banks failed.