With its insurance fund being drained rapidly by failed banks, the FDIC will disclose today how much is left in the fund and update the number of banks on its trouble list. It will also announce how it plans to shore up the fund both short-term and long-term.
As of March 31, the fund was down to $13 billion it's lowest point since the S&L crisis in 1992 when the fund dropped to $178 million and the FDIC had to borrow $15 billion from the U.S. treasury and repay it with interest.
Since the March 31 report, 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 probably isn't insolvent, but it may be close.
In the first quarter the number of banks in trouble shot up to 305 from 252 last year. That's the highest level since 1992. So far 81 banks failed this year, 25 banks failed last year and two failed in 2007. Experts expect another 150 to 200 banks failures. To shore up its fund quickly the FDIC can charge banks higher fees or it can borrow from the Treasury. The FDIC will likely announce a special assessment on the banks and possibly announce borrowing from the treasury.
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.
In the long term, the FDIC is expected to turn to foreign banks for help, as well as to private-equity funds. Wednesday the FDIC board voted 4 to 1 to reduce the cash that private-equity funds must maintain if they acquire a bank. Previously private-equity funds had to maintain a bank's capital reserves equal to 15 percent of a failed bank's assets. Under the new rules they only must maintain 10 percent. That's still higher than the 5 percent banks must maintain when they buy a failed bank.
The FDIC also decided it wanted to guard against private equity funds that might want to quickly buy and sell at a profit, so it added that a private-equity fund must maintain a bank's minimum capital levels for three years. John Bowman, acting director of the Office of Thrift Supervision voted no because he thought the reserve policy was too strict and could deter investors.
Private-equity funds tend to buy distressed companies, slash their costs quickly and resell them a few years later. But, the FDIC softened to their presence because its running out of options. The Private Equity Council estimates that the 2,000 private-equity firms in the United States have around $450 billion to spend.
The FDIC has only two options for finding more buyers of failed banks, private-equity firms or foreign banks. Which choice would you make?
Lita Epstein has written more than 25 books including Reading Financial Reports for Dummies.