Tag Archives: FDIC

Comments on Senator Sanders article on the Fed

Posted on by

Dear Senator Sanders,

Thank you for your attention to this matter!
My comments appear below:

The Veil of Secrecy at the Fed Has Been Lifted, Now It’s Time for Change

By Senator Bernie Sanders

November 2 (Huffington Post) — As a result of the greed, recklessness, and illegal behavior on Wall Street, the American people have experienced the worst economic crisis since the Great Depression.

Not to mention the institutional structure that rewarded said behavior, and, more important, the failure of government to respond in a timely manner with policy to ensure the financial crisis didn’t spill over to the real economy.

Millions of Americans, through no fault of their own, have lost their jobs, homes, life savings, and ability to send their kids to college. Small businesses have been unable to get the credit they need to expand their businesses, and credit is still extremely tight. Wages as a share of national income are now at the lowest level since the Great Depression, and the number of Americans living in poverty is at an all-time high.

Yes, it’s all a sad disgrace.

Meanwhile, when small-business owners were being turned down for loans at private banks and millions of Americans were being kicked out of their homes, the Federal Reserve provided the largest taxpayer-financed bailout in the history of the world to Wall Street and too-big-to-fail institutions, with virtually no strings attached.

Only partially true. For the most part the institutions did fail, as shareholder equity was largely lost. Failure means investors lose, and the assets of the failed institution sold or otherwise transferred to others.

But yes, some shareholders and bonds holders (and executives) who should have lost were protected.

Over two years ago, I asked Ben Bernanke, the chairman of the Federal Reserve, a few simple questions that I thought the American people had a right to know: Who got money through the Fed bailout? How much did they receive? What were the terms of this assistance?

Incredibly, the chairman of the Fed refused to answer these fundamental questions about how trillions of taxpayer dollars were being spent.

The American people are finally getting answers to these questions thanks to an amendment I included in the Dodd-Frank financial reform bill which required the Government Accountability Office (GAO) to audit and investigate conflicts of interest at the Fed. Those answers raise grave questions about the Federal Reserve and how it operates — and whose interests it serves.

As a result of these GAO reports, we learned that the Federal Reserve provided a jaw-dropping $16 trillion in total financial assistance to every major financial institution in the country as well as a number of corporations, wealthy individuals and central banks throughout the world.

Yes, however, while I haven’t seen the detail, that figure likely includes liquidity provision to FDIC insured banks which is an entirely separate matter and not rightly a ‘bailout’.

The US banking system (rightly) works to serve public purpose by insuring deposits and bank liquidity in general. And history continues to ‘prove’ banking in general can work no other way.

And once government has secured the banking system’s ability to fund itself, regulation and supervision is then applied to ensure banks are solvent as defined by the regulations put in place by Congress, and that all of their activities are in compliance with Congressional direction as well.

The regulators are further responsible to appropriately discipline banks that fail to comply with Congressional standards.

Therefore, the issue here is not with the liquidity provision by the Fed, but with the regulators and supervisors who oversee what the banks do with their insured, tax payer supported funding.

In other words, the liability side of banking is not the place for market discipline. Discipline comes from regulation and supervision of bank assets, capital, and management.

The GAO also revealed that many of the people who serve as directors of the 12 Federal Reserve Banks come from the exact same financial institutions that the Fed is in charge of regulating. Further, the GAO found that at least 18 current and former Fed board members were affiliated with banks and companies that received emergency loans from the Federal Reserve during the financial crisis. In other words, the people “regulating” the banks were the exact same people who were being “regulated.” Talk about the fox guarding the hen house!

Yes, this is a serious matter. On the one hand you want directors with direct banking experience, while on the other you strive to avoid conflicts of interest.

The emergency response from the Fed appears to have created two systems of government in America: one for Wall Street, and another for everyone else. While the rich and powerful were “too big to fail” and were given an endless supply of cheap credit, ordinary Americans, by the tens of millions, were allowed to fail.

The Fed necessarily sets the cost of funds for the economy through its designated agents, the nations Fed member banks. It was the Fed’s belief that, in general, a lower cost of funds for the banking system, presumably to be passed through to the economy, was in the best interest of ‘ordinary Americans.’ And note that the lower cost of funds from the Fed does not necessarily help bank earnings and profits, as it reduces the interest banks earn on their capital and on excess funds banks have that consumers keep in their checking accounts.

However, there was more that Congress could have done to keep homeowners from failing, beginning with making an appropriate fiscal adjustment in 2008 as the financial crisis intensified, and in passing regulations regarding foreclosure practices.

Additionally, it should also be recognized that the Fed is, functionally, an agent of Congress, subject to immediate Congressional command. That is, the Congress has the power to direct the Fed in real time and is thereby also responsible for failures of Fed policy.

They lost their homes. They lost their jobs. They lost their life savings. And, they lost their hope for the future. This is not what American democracy is supposed to look like. It is time for change at the Fed — real change.

I blame this almost entirely on the failure of Congress to make the immediate and appropriate fiscal adjustments in 2008 that would have sustained employment and output even as the financial crisis took its toll on the shareholder equity of the financial sector.

Congress also failed to act with regard to issues surrounding the foreclosure process that have worked against public purpose.

Among the GAO’s key findings is that the Fed lacks a comprehensive system to deal with conflicts of interest, despite the serious potential for abuse. In fact, according to the GAO, the Fed actually provided conflict of interest waivers to employees and private contractors so they could keep investments in the same financial institutions and corporations that were given emergency loans.

The GAO has detailed instance after instance of top executives of corporations and financial institutions using their influence as Federal Reserve directors to financially benefit their firms, and, in at least one instance, themselves.

For example, the CEO of JP Morgan Chase served on the New York Fed’s board of directors at the same time that his bank received more than $390 billion in financial assistance from the Fed. Moreover, JP Morgan Chase served as one of the clearing banks for the Fed’s emergency lending programs.

This demands thorough investigation, and in any case the conflict of interest should have been publicly revealed at the time.

Getting this type of disclosure was not easy. Wall Street and the Federal Reserve fought it every step of the way. But, as difficult as it was to lift the veil of secrecy at the Fed, it will be even harder to reform the Fed so that it serves the needs of all Americans, and not just Wall Street. But, that is exactly what we have to do.

Yes, I have always supported full transparency.

To get this process started, I have asked some of the leading economists in this country to serve on an advisory committee to provide Congress with legislative options to reform the Federal Reserve.

Here are some of the questions that I have asked this advisory committee to explore:

1. How can we structurally reform the Fed to make our nation’s central bank a more democratic institution responsive to the needs of ordinary Americans, end conflicts of interest, and increase transparency? What are the best practices that central banks in other countries have developed that we can learn from? Compared with central banks in Europe, Canada, and Australia, the GAO found that the Federal Reserve does not do a good job in disclosing potential conflicts of interest and other essential elements of transparency.

Yes, full transparency in ‘real time’ would serve public purpose.

2. At a time when 16.5 percent of our people are unemployed or under-employed, how can we strengthen the Federal Reserve’s full-employment mandate and ensure that the Fed conducts monetary policy to achieve maximum employment? When Wall Street was on the verge of collapse, the Federal Reserve acted with a fierce sense of urgency to save the financial system. We need the Fed to act with the same boldness to combat the unemployment crisis.

Unfortunately employment and output is not a function of what’s called ‘monetary policy’ so what is needed from the Fed is full support of an active fiscal policy focused on employment and price stability.

3. The Federal Reserve has a responsibility to ensure the safety and soundness of financial institutions and to contain systemic risks in financial markets. Given that the top six financial institutions in the country now have assets equivalent to 65 percent of our GDP, more than $9 trillion, is there any reason why this extraordinary concentration of ownership should not be broken up? Should a bank that is “too big to fail” be allowed to exist?

Larger size should be permitted only to the extent that it results in lower fees for the consumer. The regulators can require institutions that wish to grow be allowed to do so only in return for lower banking fees.

4. The Federal Reserve has the responsibility to protect the credit rights of consumers. At a time when credit card issuers are charging millions of Americans interest rates between 25 percent or more, should policy options be established to ensure that the Federal Reserve and the Consumer Financial Protection Bureau protect consumers against predatory lending, usury, and exorbitant fees in the financial services industry?

Banks are public/private partnerships chartered by government for the further purpose of supporting a financial infrastructure that serves public purpose.

The banks are government agents and should be addressed accordingly, always keeping in mind the mission is to support public purpose.

In this case, because banks are government agents, the question is that of public purpose served by credit cards and related fees, and not the general ‘right’ of shareholders to make profits.

Once public purpose has been established, the effective use of private capital to price risk in the context of a profit motive should then be addressed.

5. At a time when the dream of homeownership has turned into the nightmare of foreclosure for too many Americans, what role should the Federal Reserve be playing in providing relief to homeowners who are underwater on their mortgages, combating the foreclosure crisis, and making housing more affordable?

Again, it begins with a discussion of public purpose, where Congress must decide what, with regard to housing, best serves public purpose. The will of Congress can then be expressed by the institutional structure of its Federal banking system.

Options available, for example, include the option of ordering that appraisals and income statements not be factors in refinancing loans originated by Federal institutions including banks and the Federal housing agencies. At the time of origination the lenders calculated their returns based on mortgages being refinanced as rates came down, assuming all borrowers would be eligible for refinancing. The financial crisis and subsequent failure of policy to sustain employment and output has given lenders an unexpected ‘bonus’ through a ‘technicality’ that allows them to refuse requests for refinancing at lower rates due to lower appraisals and lower incomes.

6. At a time when the United States has the most inequitable distribution of wealth and income of any major country, and the greatest gap between the very rich and everyone else since 1928, what policies can be established at the Federal Reserve which reduces income and wealth inequality in the U.S?

The root causes begin with Federal policy that has resulted in an unprecedented transfer of wealth to the financial sector at the expense of the real sectors. This can easily and immediately be reversed, which would serve to substantially reverse the trend income distribution.

Sincerely,

Warren Mosler

Share

Next Debt Crisis May Start in Washington: Bair

Posted on by

She’s as much a part of the problem as any of them.

Also, she continues to support taxing banks for FDIC losses, which works counter to Fed rate setting policy.
Across the board taxes on banks hike rates charged to borrowers, while the Fed is trying to get them down.

Also, why should a good bank be charged for losses of failed banks, when bank assets, lending policies, and operations in general are fully regulated and supervised by the FDIC? She’s making good banks pay for FDIC failures.

Banks are designated agents of the Fed, public/private partnerships established for public purpose, govt. regulated and supervised, and as such should not be charged anything for FDIC insurance. It makes no sense for the govt. to charge one of its agencies for its support.

Next Debt Crisis May Start in Washington: Bair

The US needs to take urgent action to cut its debt in order to prevent the next financial crisis, which may start in Washington, Sheila Bair, chair of the Federal Deposits Insurance Corp. (FDIC) wrote in an editorial in the Washington Post.

The federal debt has doubled over the past seven years, to almost $14 trillion, and the growth is a result of both the financial crisis and the government’s “unwillingness over many years to make the hard choices necessary to rein in our long-term structural deficit,” Bair wrote.

Share

FDIC Proposes Long-Term DIF-Management Plan

Posted on by

The FDIC taxing banks to cover losses hasn’t been well thought out.

A universal bank tax is functionally equivalent to an interest rate hike for borrowers that doesn’t get passed through to savers.

FDIC Proposes Long-Term DIF-Management Plan

The FDIC board of directors proposed a long-range Deposit Insurance Fund management approach that includes a plan to restore the DIF. The board adopted a notice of proposed rulemaking on its long-term management plan that calls for a lower assessment rate to take effect when the reserve ratio equals 1.15 percent. Progressively lower assessment rate schedules would take effect in lieu of dividends when the reserve ratio reaches 2 percent and 2.5 percent. The DIF reserve ratio also must be at least 2 percent before a period of large fund losses, and average assessment rates over time must be approximately 8.5 basis points. The board said the goal is maintaining a positive fund balance even during periods of large fund losses and steady, predictable assessment rates throughout economic and credit cycles.

The board also adopted a DIF restoration plan to ensure that the fund reserve ratio reaches 1.35 percent by Sept. 30, 2020, as required by the Wall Street Reform Act. The DIF restoration plan would forgo the 3-basis-point increase in assessment rates scheduled for Jan. 1, 2011, and maintain the current rate schedule largely because projected DIF losses for 2010-2014 have dropped from $60 billion to $52 billion. The plan also calls for a new rulemaking next year on how to offset the effect of the Wall Street Reform Act requirement on community banks with less than $10 billion in assets.

Next month, the FDIC is expected to issue proposed regulations implementing the assessment-base change mandated by the Wall Street Reform Act. These new regulations will include proposed changes to the assessment rates necessitated by the change in the assessment base and, according to the FDIC, will ensure that the revenue collected under the new assessment system will approximately equal that under the existing system. Read more.

Share

Chairman Bernanke address to students

Posted on by

Bernanke says more Fed asset purchases could help

October 4 (Reuters) — The Federal Reserve’s asset purchases lowered borrowing costs and supported the economy, and more buying could further ease financial conditions, Federal Reserve Chairman Ben Bernanke said on Monday.

He leaves out the negative influence of the interest rate and fiscal channel that he wrote about in his own 2004 paper. The economy is a net receiver of interest from the govt and lower rates reduces interest payments from the govt to securities holders. And in this cycle savers lost more interest income than borrowers gained, with the difference going to wider net interest margins for banks, who have no propensity to consume from that interest income.

“I don’t have a number to give you, but I do think that the additional purchases, although we don’t have precise numbers, have the ability to ease financial conditions,” Bernanke said.

Bernanke said he was convinced that the Fed’s massive purchases from March of 2009 until early 2010 had lowered effective interest rates at a time the central bank’s benchmark lending rates were anchored near zero, where they remain.

The buying program “increased the willingness of investors to take a reasonable amount of risk and create some support for the economy,” he said.

Again, he leaves out the fact that all the $50 billion + of annual interest earned by the Fed on its new portfolio of over $2 trillion in securities would otherwise have gone to the economy, but instead is turned over to the us treasury, thereby functioning as a tax.

In September, the Federal Open Market Committee said it was ready to take further steps to help the U.S. recovery if the economy stays sluggish. Reviving the program to buy assets such as U.S. Treasuries seem like a potential step.

In a wide-ranging, hour-long forum with university students in Providence, Rhode Island, Bernanke defended the U.S. government’s often criticized program to support banks during the global financial crisis.

The Troubled Asset Relief Program, or TARP, has turned out to be a ‘pretty good investment” for taxpayers money loaned to banks during the financial crisis is returned with interest.

Many people don’t understand that TARP was designed to help the economy, not the banks, and that the country’s economic downturn would have been much worse without it, Bernanke said.

Nor does he seem to understand it was nothing never anything more than regulatory forbearance, and not a fiscal expenditure. The FDIC, for all practical purposes, already guaranteed all bank deposits should bank losses exceed the amount of the bank’s private capital. So adding more public capital through tarp rather than simply granting regulatory forbearance (along with imposing any terms and conditions the govt might desire) was non nonsensical, politically destructive and divisive, and demonstrative of a complete lack of understanding of the banking system by the entire govt., media, and financial sector in general.

Share

Citibank saga draft

Posted on by

The Unspoken Macro of the Citibank Saga

I’m writing this because it’s how it is and I haven’t seen it written elsewhere.

Let’s assume, for simplicity of the math, Citibank pre crisis had $100 billion private capital, $900 billion in FDIC insured deposits, and $1trillion in loans (assets), which is a capital ratio of 10%. (The sub debt is part of capital. And notice this makes banks public/private partnerships, 10% private and 90% public. Ring a bell?)

This means once Citibank loses more than $100 billion, the FDIC has to write the check for any and all losses.
So if all the remaining loans go bad and become worthless, the FDIC writes the check for the entire $900 billion.

Then the crisis hits, and, again for simplicity of the math, lets assume Citibank has to realize $50 billion in losses. Now their private capital is down to only $50 billion from the original $100 billion.

This drops Citibank’s capital ratio to just over 5%, as they now have only $50 billion in private capital and 950 billion in loan value remaining as assets. So now if Citibank loses only $50 billion more the FDIC has to start writing checks, up to the same max of $900 billion.

But now Citibank’s capital ratio is below the prescribed legal limit. The FDIC needs a larger amount of private capital to give it a larger cushion against possible future losses before it has to write the check. So it’s supposed to declare Citibank insolvent, take it over, reorganize it, sell it, liquidate the pieces, etc. as it sees fit under current banking law. But the Congress and the administration don’t want that to happen, so Treasury Secretary Paulson comes up with a plan. The Treasury, under the proposed TARP program, will ‘inject’ $50 billion of capital in various forms, with punitive terms and conditions, into Citibank to restore its 10% capital ratio.

So Obama flies in, McCain flies in, they have the votes, they don’t have the votes, the Dow is moving hundreds of a points up and down with the possible vote, millions are losing their jobs as America heads for the sidelines to see if Congress can save the world. Finally the TARP passes, hundreds of billions of dollars are approved and added to the federal deficit, with everyone believing we are borrowing the funds from China for our grand children to pay back. And the Treasury bought $50 billion in Citibank stock, with punitive terms and conditions, to restore their capital ratio and save the world.

So then how does Citibank’s capital structure look? They still have the same $50 billion in capital which takes any additional losses first. Then, should additional losses exceed that $50 billion, the Treasury starts writing checks, instead of the FDIC. What’s the difference??? It’s all government, and the FDIC is legally backstopped by the treasury, and taxes banks to try to stay in the black. (riddle, what begins with g and is authorized to tax?)

Share

FDIC – Lets save

Posted on by

In case you thought Shiela Bair understands banking and the monetary system.

All this can do is further reduce aggregate demand.

The entire administration including the Fed and Tsy seems hopelessly mired in gold standard economics.

FOR IMMEDIATE RELEASE
February 22, 2010 Media Contact:
Greg Hernandez (202) 898-6984
Cell: (202) 340-4922
Email: ghernandez@fdic.gov

The Federal Deposit Insurance Corporation (FDIC) is calling upon consumers across the nation during America Saves Week to consider establishing a basic savings account or boosting existing savings. FDIC Chairman Sheila Bair said, “One fundamental lesson of the financial crisis is that savings can help families withstand sudden changes in their economic well being. Establishing a savings account in a federally insured institution is a great first step to build wealth and begin a savings habit that will last a lifetime.”

The personal savings rate rose to 4.6 percent in 2009 from 2.7 percent in 2008, according to the U.S. Department of Commerce. “I am pleased to see that people are saving more of their hard-earned money and building wealth. Having personal savings for an emergency fund or saving for a future expenditure, such as a college education, can make a big difference in avoiding other costly alternatives. I’ve always been a big advocate of a back-to-basics approach to financial services; it’s my hope that Americans’ increase in savings is the beginning of a long-term trend,” Bair said.

“Money saved by consumers also provides a stable source of funding for investments in the economy that benefit all Americans,” said Bair. “In fact, a country with robust savings generally has more capital to fund investments and support economic growth over the long-term. As demonstrated recently, it is harmful to an economy when consumers spend beyond their means, financed by debt that they cannot afford to repay.”

To learn more about America Saves Week and about savings-related resources from the FDIC, please visit http://www.fdic.gov/deposit/deposits/savings.html.

Share

Fixing the small banks

Posted on by


[Skip to the end]

Fixing the Small Banks

The Obama administration has been preaching the importance of fixing the small banks and getting them lending again. This will review what I see as the critical issue and how to fix it.

First, the answer:

1. The Fed should loan fed funds (unsecured) in unlimited quantities to all member banks.

2. The regulators should then drop all requirements that a % of bank funding be ‘retail’ deposits.

Yes, it is that simple. This simple, easly to implement ‘fix’ will immediately work to restore small bank lending from the bottom up by removing unnecessary costs imposed by current government policy.

The current problem with small banks is their too high marginal cost of funds. The only reason the Fed hasn’t expressed an interest in ‘opening the spigot’ and supplying unlimited funding at its target interest rate to any member bank to bring down this elevated cost of funds has to be a lack of understanding of our banking system.

Currently the true marginal cost of funds to small banks is probably at least 2% over the fed funds rate. This is keeping their minimum lending rates at least that much higher, which also works to exclude borrowers who need that much more income to service their borrowings, all else equal.

The primary reason for the high cost of funds is the requirement for ‘retail deposits’ that causes the banks to compete for a finite amount of available deposits in this ‘category.’ While, operationally, loans create deposits, and there are always exactly enough deposits to fund all loans, there are some leakages. These include cash in circulation, the fact that some banks, particularly large, money center banks, have excess retail deposits, and a few other ‘operating factors.’ This causes small banks to bid up the price of retail deposits in the broker CD markets and raise the cost of funds for all of them, with any bank considered even remotely ‘weak’ paying even higher rates, even though its deposits are fully FDIC insured. Additionally, small banks are driven to open expensive branches that can add over 1% to a bank’s true marginal cost of funds, to attempt to attract retail deposits. So by driving small banks to compete for a limited and difficult to access source of funding the regulators have effectively raised the cost of funds for small banks.

It should be clear my solution would immediately lower the marginal cost of funds for small banks. I’ll now attempt to address the usual host of objections to my proposal.

There are always two fundamentals to keep in mind when contemplating banking with a non convertible currency and floating exchange rate:

1. The liability side of banking is not the place for market discipline.

2. The Fed and monetary policy in general is about prices (interest rates) and not quantities.

Disciplining banks on the liability side has been tried repeatedly and always and necessarily fails. First, it’s fundamentally impractical to the point of ridiculous to expect anyone looking to open a checking account or savings account, for example, to be responsible for analyzing the finances of competing banks for solvency, when even Wall Street analysts can’t reliably do this. The US leaned this the hard way when the banking system was closed in 1934, reopening with Federal deposit insurance for bank deposits for the sole purpose of removing this responsibility from the market place. Regulation and supervision on the asset side then became the imperative. And while we have seen periodic failures due to lax regulation and supervision of the asset side of the US banking system, and it’s a work in progress, the alternative of using the liability side of banking for market discipline exposes the real economy to far more disruptions and far more destructive systemic risk.

Those who understand reserve accounting and monetary operations, including those directly involved in monetary operations at the world’s central banks, have known for decades that in banking, causation runs from loans to deposits, with reserve requirements, if any, being merely a ‘residual overdraft’ at the central bank and not a control variable. This includes Professor Charles Goodhart at the Bank of England, who has written extensively on this subject for roughly half a century, endlessly debating the ‘monetarist’ academic economists who spew gold standard and fixed exchange rate rhetoric, and who are unaware of how monetary operations are altered when there is no legal convertibility of a currency. Recall the ‘500 billion euro day’ back in 2008 when the ECB added that many euro in reserves to its banking system, and a week later the monetarists pouring over the data ‘couldn’t find it.’ The fact that they even looked was evidence enough they had no actual knowledge of reserve accounting and monetary operations. And, more recently, the notion that ‘quantitative easing’ makes any difference at all apart from changes in interest rates (it’s always about price and not quantity) reinforces the point that there is very little understanding of monetary operations and reserve accounting. While Professor Goodhart did declare quantitative easing in the UK a ‘success’ he did so on the basis of how it restored ‘confidence,’ making it clear that there was no actual monetary channel of causation from excess reserves to lending. Banks do not ‘lend out’ reserves. Loans create their own deposits. Total reserves are not diminished by lending. This is operational and accounting fact, and not theory or philosophy.

What this means in relation to my proposal of unlimited lending by the Fed to small banks at its target rate, is that any lending by the Fed will not alter anything regarding lending and the ‘real economy’ in any other regard, apart from the resulting term structure of interests per se. (Also, and not that it matters in any event, total lending by the Fed won’t exceed funds ‘hoarded’ by some banks along with the usual operating factors that routinely ‘drain’ reserves.)

In other words, the notion that this policy will somehow result in some inflationary monetarist type expansion is entirely inapplicable with a non convertible currency and floating exchange rate policy.

The other common concern is the risk to the Fed of lending unsecured to its member banks. However, there is none, if you look at government from the macro level. All bank assets are already regulated and supervised, and the banks are continually subjected to solvency tests. This means government has already deemed to the banks ‘safe to lend to.’ Furthermore, functionally, the fact that banks can indeed fund themselves in unlimited size with FDIC insured deposits means the government already lends to banks in unlimited quantities, protecting itself by regulating and supervising the assets, including asset quality, capital requirements, etc. Therefore, the Fed asking for collateral from its member banks is entirely redundant, as well as disruptive and a cause of increased rates to borrowers.

Conclusion: If the Obama administration had the knowledge, they would immediately move to implement my proposals to support small banking.


[top]

Share

FDIC fee proposal

Posted on by


[Skip to the end]

Regarding FDIC fees, the smaller the better, so nice to seem them sort of moving in that direction.

All they do is raise rates as they raise the common cost of funds for banks, and Fed policy is to lower rates.

Be nice to have leadership that understands banking and the monetary system!

From: MICHAEL CLOHERTY

Details on the proposal still rolling in. Two immediate takeaways:
less acute quarter-end dislocations, and definitional problems in LIBOR
likely to remain. There will be no more special assessments– those
assessments were based off of quarter end levels of assets, so banks had
a very strong incentive to squeeze quarter end balance sheets. Regular
fees are based off of quarterly average levels of insured deposits, so
you won’t get the same degree of quarter end window dressing (which
means smaller market dislocations).

In addition, they are talking about relatively moderate increases in
future FDIC fees– a 3bp increase in 2011. Fees will be lower than the
23bps hit after the S&L crisis. That means there will be less of a
shift toward uninsured deposits (overseas deposits) in order to avoid
that fee. Which means activity in eurodollar deposits remains light, so
there is no good benchmark for LIBOR (banks are likely to continue to
look at CP/CD rates when submitting their settings).

There will be a near-term increase in bank financing needs, as banks
need to come up with $45bn to prepay fees. This may create a small
hiccup in the downward trend in CP, as well as some additional bank
issuance in the 2yr to 3yr sector.

Also, a small decline in bill supply over year end– the FDIC will take
the $45bn and buy “nonmarketable treasuries” with it (the same IOUs that
are in the social security trust fund). The Tsy will take the $45bn of
cash and spend it, so they dont need to issue quite as many bills as
they otherwise would have. Note that the payments are due Dec 30.


[top]

Share

FDIC

Posted on by


[Skip to the end]

The FDIC gets the funds from the treasury as needed and then tries to tax the banks to pay it back.

All that does is raise the marginal cost of credit via a transfer to the govt.

Which reduces aggregate demand. Just one more example of a confused govt policy.

FDIC’s Coffers Are Depleted, It May Need Help

August 27 (AP) — The coffers of the Federal Deposit Insurance Corp. have been so depleted by the epidemic of collapsing financial institutions that analysts warn it could sink into the red by the end of this year.

That has happened only once before — during the savings-and-loan crisis of the early 1990s, when the FDIC was forced to borrow $15 billion from the Treasury and repay it later with interest.

Small and midsize banks across the country have been hurt by rising loan defaults in the recession. When they fail, the FDIC is responsible for making sure depositors don’t lose a cent. It has two options to replenish its insurance fund in the short run: It can charge banks higher fees or it can take the more radical step of borrowing from the U.S. Treasury.

None of this means bank customers have anything to worry about.

The FDIC is fully backed by the government, which means depositors’ accounts are guaranteed up to $250,000 per account. And it still has billions in loss reserves apart from the insurance fund.


[top]

Share