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FDIC's Road to Ruin
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20119 |
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CURRENT ISSUES
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| Issue
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2 / 1992 |
2,831 Words |
| Author
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John Attarian
John Attarian, a freelance writer in Ann Arbor, Michigan, has
contributed several economics articles and book reviews to The
World & I. He is the author of Social Security: False
Consciousness and Crisis (Transaction Publishers, 2002). |
On October 23, 1991, the Federal Deposit Insurance Corporation (FDIC) tripled its estimate of the 1992 deficit in its Bank Insurance Fund (BIF) to $9.6 billion, adding that it may hit $14 billion if the economy worsens. With less than $2 billion covering more than $2 trillion in insured deposits--or less than a dime backing every $100 in insured deposits--the fund is certain to be exhausted soon. Already burdened with a bailout for the thrifts, estimated by the General Accounting Office (GAO) to cost $500 billion over 40 years, taxpayers will soon shoulder another, for the banks.
FDIC's demise has many causes: flaws inherent in deposit insurance, banking and economic changes, regulatory inadequacy, and Congressional blunders.
The Good Years
After the bank panic of 1933, Congress passed the Banking Act of 1933 (Glass-Steagall Act), creating FDIC to protect depositors, and more important, to restore confidence in the banks and avert runs. If a bank failed and lacked cash to reimburse depositors, FDIC would finance this by charging its member banks a premium, at an annual assessment rate of one-twelfth of one percent (.083 percent) of total deposits.
World War II's prosperity practically ended bank failures, while high personal incomes and restricted consumption produced rapid growth in deposits and therefore in FDIC's premium income. By the end of 1946, the fund had over $1 billion; by 1950, over $1.2 billion.
Early Congressional Mismanagement
Bankers began grumbling that the premium was too high. Since interest rates were low, bank earnings were lagging behind rises in prices and deposit insurance costs. Congress responded by introducing premium rebates with the Federal Deposit Insurance Act of 1950. After deducting operating expenses and any insurance fund losses from premium income. FDIC would rebate 60 percent of the remainder to member banks, cutting premiums roughly in half. In 1960, Congress increased the rebate to 66.66 percent of FDIC's net premium income.
The Deposit Insurance Act also raised the insured-deposit ceiling to $10,000, increasing FDIC's exposure by about 15 percent. This simultaneous increase in potential obligations and reduction in premiums seemed harmless because banking--conservative, closely regulated, facing
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