Saving the FDIC: The Banks Need to Have Some Skin in the Game
Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.
Struggling to stay afloat as the federal deposit insurance fund dwindles, The Federal Deposit Insurance Corporation (FDIC) issued a proposal yesterday requiring banks to prepay $45 billion in insurance premiums. FDIC Chairman Sheila Blair said it was time for the banking industry “to step up” and get involved in industry solutions.
The problem facing the FDIC is money; there simply is not enough of it. The FDIC has already closed 95 banks this year (compared to 25 total in 2008) and 416 more are classified at high risk of failure. The solution to increase reserves proposed yesterday would require banks to prepay their premiums for 2010-2012. This would generate money upfront and prevent FDIC funds from drying up.
Critics of this pre-pay solution (largely led by the banks themselves) have offered two perilous alternatives:
The first alternative proposed by critics is to use taxpayer dollars by dipping into the FDIC’s credit line with the Treasury and borrowing from the government. Use taxpayer dollars??? Haven’t Main Street taxpayers’ bank accounts been damaged enough by Wall Street’s blunders? A solution that “fixes” the problem by penalizing Main Street is shameful and inexcusable.
The second alternative proposes that the FDIC borrow from the banks themselves. In effect, the FDIC would regulate the very banks that it is borrowing from. That scenario creates a dangerous conflict of interest. Banks will have one up on the regulators that owe them money. (Surely, you would take it easy on your lender.)
Sheila Blair and the FDIC are right. The banking industry must step up and take part in finding a solution to a problem that they were responsible for creating in the first place.
Assisted by Jess Begen and Zach Kady.
