As FDIC fund dwindles, foreign banks could save the day

As the FDIC fund dwindles to its lowest point since 1992, foreign banks are stepping up to save the day. Fewer U.S. banks have the reserves to buy failed banks, so the FDIC is looking at changing the rules to allow private investment groups to buy banks. It's also turning to foreign banks, especially those that already have a presence in the U.S.

The FDIC bank rescue fund had a balance of $13 billion on March 31. Since that time three major bank failures -- BankUnited Financial Corp in May and Colonial BancGroup and Guaranty Financial Group in August -- cost the fund $10.7 billion. Another 53 banks also failed in the meantime, with an estimated total cost for all bank failures since March 31 of $16 billion. Even at $13.2 billion the fund was at its lowest point since 1992, when it was $178.4 million. Since March, banks have paid fees so the fund isn't insolvent, but it may be close.

If the fund is drained, it can tap a line of credit from the Treasury Department of $100 billion, with temporary borrowing authority of $500 billion until 2010. If necessary, the FDIC could go to Congress to ask for an extension of its line of credit. Congress gave the FDIC the current extension in May.

Right now the FDIC's only option for rebuilding the fund is a special assessment of banks. Banks already faced a special assessment in May as an emergency fee of 5 cents for every $100 of assets, excluding Tier 1 capital, to raise $11 billion in the second quarter. Obviously that special assessment is gone. In an interview with Bloomberg TV on August 5, FDIC Chairman Sheila Bair said there will likely be another assessment in the fourth quarter. The FDIC has until September 30 to adopt that fee.

Bair also proposed to Congress that it change the rules so banks that take on risks beyond traditional lending would pay additional fees. Representative Barney Frank, House Financial Services Committee Chairman, agrees with this proposal.

But, even with additional fees collected in a special assessment, the FDIC is running out of U.S. banks with enough capital to buy the growing number of failed banks. Since the crisis started, 101 banks have failed and about another 150 to 200 banks may still be at risk of failure.

The FDIC may turn to more foreign banks for help, as it did with the purchase of Guaranty Financial Group in Texas. The successful bidder on that bank was Spanish bank Banco Bilbao Vizcaya Argentaria (BBV), which already has a significant presence in the U.S. with 583 branches in Texas, Alabama, Arizona, Florida, Colorado and New Mexico.

Another bank likely to continue to bid for U.S. banks is the Canadian Toronto-Dominion Bank through its Portland, Maine subsidiary TD Bank (TD). TD Bank's president Ed Clark even states that this is part of his strategic plan for the bank in a video on its website. Other banks with a presence in the U.S. include French bank BNP Paribas (BNPQF) through its subsidiary Bank of the West; Rabobank Group of Utrecht, Netherlands through its U.S. subsidiary Rabobank, the El Centro in California; and Bank of Tokyo-Mitsubishi, which owns UnionBanCal Corp.

The FDIC will likely be more comfortable turning to banks already operating in the U.S. than to banks outside the U.S., but as the numbers continue to mount they may have no choice but to consider bids from banks trying to get their foot in the door. In addition to considering more foreign bank purchases, Bair wants to loosen the restrictions on and make it easier for private equity groups to buy failed banks. Even though the FDIC may be able to find buyers, it's still signing deals to share losses with these banks. So costs to the fund will still be in the billions and U.S. taxpayers could still end up paying for lax regulation of the banks during the boom years, while a greater percentage of our banks may be owned by foreign companies.

Lita Epstein has written 25 books including Reading Financial Reports for Dummies.

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