Bank Failures May Accelerate in 2010

A part of the bank-reform legislation being negotiated in Congress that could have a chilling effect on bank liquidity is the requirement for secured lenders, such as the Federal Home Loan Banks, to take "haircuts" of 20% when a borrowing bank fails rather than being paid in full by the FDIC. That could seriously disrupt liquidity for banks relying on wholesale funding.

Prepaying the FDIC

Headlines that said the FDIC was running out of money were misleading. While the balance of the agency's deposit insurance fund indeed fell to minus $8.2 billion in September, even after insured institutions were charged a special assessment of 5 basis points on total assets, less core capital, contingent loss reserves of $38.9 billion already set aside to cover expected losses on 2010 left the agency with total deposit insurance fund reserves of $30.7 billion.

The FDIC will further beef up its resources by requiring insured institutions to pony up three years of deposit insurance premiums in this month, or about $45 billion. To keep prepayments from affecting institutions' earnings, banks and thrifts will be allowed to book payments on a regular quarterly basis.

Based on initial loss estimates, bank failures during 2009 have cost the deposit insurance fund $32.4 billion.

--Written by Philip van Doorn in Jupiter, Fla.

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