” ‘Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,’ said Camden R. Fine, president of the Independent Community Bankers.” — New York Times, Sept 22, 2009
We learn today from the New York Times that the FDIC — the independent government agency that insures your bank accounts — is effectively insolvent. It is going to ask insured banks to prepay three years worth of deposit insurance premiums in order to raise $45 billion to replenish the FDIC insurance fund.
What makes this interesting is that the FDIC is backed by the “full faith and credit” of the US government. In other words, as long as the US government is solvent, your bank accounts are safe. There was no need for Sheila Bair, the head of the FDIC, to ask banks for funds. The notion that the banks will rescue the FDIC is pure theatrics.
There is apparently no interest cost to the loans (details are here), so to the extent the banks forego interest one could say they are subsidizing the FDIC. However, the notion that this borrowing is not public debt is ludicrous, and it is exactly the sort of accounting fiction that helped cause the crisis. Because the Treasury backstops the FDIC, prepaid assessments from the banks represent public debt, even if it is off the official balance sheet.
I can’t resist including one other quote from the New York Times article: “Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family. It is much better for perceptions than having the fund borrow from somewhere else.” Karen M. Thomas, executive vice president of government relations at the Independent Community Bankers of America. (emphasis added)