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Next in Line for a Bailout, the FDIC?

March 9, 4:26 p.m.: This post has been corrected.

We've tended to focus our bailout coverage on the billions of taxpayer dollars doled out by the Treasury Department. But Treasury hasn't been working alone, of course. There's the Federal Reserve, that opaque public-private institution that measures by the trillion. And then there's the Federal Deposit Insurance Corporation (FDIC), which has been working shoulder to shoulder with the Treasury and Fed, as well as catching banks as they fall.

It's looking increasingly like the FDIC will have to turn to Treasury to help it weather the storm. As you can see in this graph, FDIC's deposit insurance fund has plummeted in the past year as a growing number of banks have failed.

The FDIC's deposit insurance fund, over time.

"We'd like a bigger cushion," FDIC Chair Sheila Bair said on CBS' Early Show this morning. The fund relies on fees from member banks, and Bair held out hope that a recent bump in those fees would provide enough cushion. But if it doesn't, Bair said, people shouldn't be nervous about their FDIC-insured accounts: "It is important for people to understand, we're backed by the full faith and credit of the United States government. The money will always be there. We can't run out of money."

New legislation requested by the FDIC and the Fed seeks to make sure that's true, even if FDIC's cushion proves dramatically inadequate. The legislation would allow the FDIC to borrow $100 billion from Treasury and as much as $500 billion with White House approval. Currently, FDIC only has access to up to $30 billion.

It wouldn't be the first time that the Fed has been forced to borrow from Treasury. Back in the early nineties, as you can see in the graph, the fund dipped into the red from the continued pressure of the hundreds of bank failures due to the savings and loan crisis. The FDIC paid back the loan with interest within a couple years. But things now are deteriorating rapidly enough for regulators to be concerned.

Until recently, FDIC Chair Sheila Bair had insisted that the FDIC could survive without taxpayer help. In September, Bair responded sharply to a Bloomberg News piece that reported that the Treasury "will almost certainly come to the rescue by lending money to the FDIC," possibly as much as $150 billion.

Bair's main objection seems to have been to the story's use of the word "bailout." The fund was in a "strong financial position," she said in a statement, and she did "not foresee...that taxpayers may have to foot the bill for a 'bailout.'" If the FDIC had to turn to Treasury for a loan, she said, the money would be paid back from seized bank assets and bank fees. The taxpayer would never take a hit.

She's still trying to fight any suggestion that the FDIC might need a "bailout." Last Wednesday, she dismissed the idea of taxpayer support, saying it could "paint all banks with the 'bailout' brush."

And yet, things are increasingly looking that way. Recently Bair, warning that the fund could dry up later this year, tried to boost it by proposing an increase in the fees banks pay to the FDIC. After bankers across the country howled that the increase would be draconian in the midst of a severe recession, Bair agreed to halve it.

The main pressure on the fund seems to be the growing number of bank failures, which the FDIC handles. The FDIC guarantees deposits at member banks up to $250,000. But the FDIC has also been quite involved in the government's continued efforts to stabilize the financial system -- for instance it now guarantees bank bond issues and checking accounts that weren't earlier covered by the FDIC. About 7,200 banks are participating in the bond issue program and about 8,200 banks are participating in the guarantee program for additional non-interest-bearing accounts, according to Subsidyscope.

The FDIC also teamed up with Treasury and the Fed to guarantee a pool of assets for both Citigroup and Bank of America, arrangements that put the FDIC on the hook for a total as high as $12.5 billion.

Correction: This article earlier incorrectly cited Subsidyscope data on banks participating in the FDIC’s additional guarantee programs. We originally stated that 14,000 banks were participating in the two programs; in fact, about 7,200 banks are participating in the bond issue program and about 8,200 banks are participating in the guarantee program for additional non-interest-bearing accounts.

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