A little help for the FDIC

The FDIC is taking a little breather from bailing out failed banks to... wait for it... be bailed out itself. Turns out that this "no cost to the taxpayer" program that was supposed to be funded by deposit insurance premiums was charging too low of a rate, and is now stock dangerously undercapitalized (thanks to a provision that the FDIC's fund should be capped at 1.25% of deposits). So Senator Chris Dodd (D-CT), Chairman of the Senate Banking Committee, introduced a bill at the behest of FDIC Chairwoman Sheila Bair to raise the FDIC's borrowing maximum from $30B to $500B, a better than 10x increase.

This is a prudent move. The FDIC's deposit insurance fund is running dangerously low, with only $35B in the insurance fund as of Q3 2007, dropping to $19B by year end. The result is a paper-thin base of capital to insure deposits: the FDIC's $19B of capital amounts to 0.4% of U.S. deposits (known as the Deposit Insurance Fund Ratio, or DIF ratio). This is a substantial drop from the usual 1.2%+ range. To raise this ratio, the FDIC has two options: borrow from Treasury, or make the banks pay more. Making the good banks pay for the bad banks' mistakes during a credit contraction has drawn howls of protest (including from this space). Eliminating any doubt of the FDIC's solvency is the right move at this moment in the crisis... let's hope Congress speeds through this policy change.