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FDIC Admits Short-Term
Loans Might Be Needed

By Damian Paletta and Jessica Holzer
The Wall Street Journal
8-27-8
 
WASHINGTON -- Federal Deposit Insurance Corp. Chairman Sheila Bair said Tuesday her agency might have to borrow money from the Treasury Department to see it through an expected wave of bank failures.
 
Ms. Bair said the borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank. The borrowed money would be repaid once the assets of that failed bank are sold.
 
The last time the FDIC borrowed funds from Treasury came at the tail end of the savings-and-loan crisis in the early 1990s after thousands of banks were shuttered. That the agency is considering the option again, after the collapse of just nine banks this year, illustrates the concern among Washington regulators about the weakness of the U.S. banking system in the wake of the credit crisis.
 
"I would not rule out the possibility that at some point we may need to tap into [short-term] lines of credit with the Treasury for working capital, not to cover our losses, but just for short-term liquidity purposes," Ms. Bair said in an interview. Ms. Bair said such a scenario was unlikely in the "near term."
 
She said she did not expect the FDIC to take the more dramatic step of tapping a separate $30 billion credit line with Treasury, which has never been used.
 
The FDIC said Tuesday its "problem" list of banks at risk of failure had grown to 117 at the end of June, compared with 90 at the end of March.
 
The biggest dent came from the July 11 failure of IndyMac Bank, which the agency now says is expected to cost $8.9 billion. Previously it had said losses would be between $4 billion to $8 billion.
 
In another move to bolster the insurance fund, Ms. Bair said the agency will propose in October charging higher premiums to thousands of U.S. banks. These contributions are one of the fund's major sources of income. The FDIC has been wrestling with how much to raise the fees because the extra expense would put stress on already struggling financial institutions.
 
Ms. Bair said the agency could charge higher premiums to banks that rely on high-risk deposits to fuel growth or have an "excessive reliance" on secured funding, such as advances from one of the 12 federal home-loan banks. Banks with less risky profiles would still likely have to pay more, but she said their fees shouldn't increase as much as high-risk banks.
 
"We should reward behavior that reduces our costs," Ms. Bair said.
 
The FDIC was created during the Great Depression, and in 1990 it received the authority to borrow short-term funds from Treasury. It tapped that facility in 1991 and by June 1992 had accumulated loans of $15.1 billion. The money was repaid by August of the following year. This is just one of the sources of funding available to the FDIC, ensuring it can always pay depositors.
 
This time around, the FDIC would use the funds to bridge the gap between paying depositors and selling a bank's assets, which can take several years in the worst cases.
 
In the FDIC's quarterly review, issued Tuesday, the agency unveiled a litany of data that shows banks reeling under the pressure of bad loans. It said the U.S. banking industry reported net income of $5 billion in the second quarter, the second-lowest level since the end of 1991. Also, the amount of loans and leases banks wrote off entirely jumped in the quarter to $26.4 billion, the highest level since 1991.
 
The percentage of "noncurrent" loans and leases -- such as those more than 90 days past due -- hit 2.04% at the end of the second quarter, the highest level since 1993.
 
Firms set aside $50.2 billion to cover such loans, more than four times the amount of a year ago. Still, the FDIC said the reserves weren't keeping pace with higher delinquencies.
 
 
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