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FDIC Cuts Bank Insurance Fees

In a bow to struggling banks, the FDIC has agreed to slash its insurance reserves on banks, and that could open up the pipelines for more credit and lending.

Here's the back story. The Federal Deposit Insurance Corporation, or FDIC, is responsible for insuring the bank deposits of tens of millions of Americans. A big chunk of their reserve fund comes through fees charged to banks to participate in the FDIC insurance program.

Banks generally have no problem with the FDIC's insurance deal; having federally backed insurance is a big selling point to a bank trying to woo customers.

The problem, though, stems from the lousy economy and the collapse of a burgeoning number of U.S. banks.

Overall, the FDIC insures the deposits of about 8,400 banks through February 2009. The FDIC has already closed 36 U.S. banks in 2009, compared to 25 in 2008 (during the last big banking crisis the FDIC closed more than 500 U.S. banks in 1989).

When the FDIC closes a bank, it either tries to pursue a new buyer for the failed bank (as it did for Washington Mutual when JPMorgan Chase (JPM) stepped in to take over) or it closes the bank and pays off the deposits for up to $250,000 in assets.

Consequently, in a troubled financial environment where the FDIC is paying out billions in deposit insurance to customers, it's going to need more money. The agency estimates it will spend about $70 billion by 2013 in insurance payouts to customers at failed banks. As a result, the FDIC's insurance fund is at an all-time low at $18.9 billion at the end of 2008, as opposed to $52.4 billion at the end of 2007.

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