Foreclosure Crisis Will Cost Deposit Insurance Fund by Over $40 Billion

The foreclosure related crisis that has led to the bank failures would ultimately cost the deposit insurance fund by over $40 billion over the forthcoming four years. This is direct fallout from the weakening economy.

John Bovenzi of Federal Deposit Insurance said that the estimate losses of $40 billion will run through up to 2013, would in all probability be exceeded. Testifying to a House hearing he said that the Congress should increase its line of credit to the agency three times more to touch $100 billion. The present amount of $30 billion is grossly insufficient.

So far FDIC has not drawn on that credit line but such a boost would guarantee “that the public has no confusion or doubt about the government’s commitment to insured depositors” said Bovenzi.

In 2008 there had been 25 bank failures in USA. It was more than the total of the previous five years. This year in one week 3 banks failed – equalling to the total failures of 2007. This year 6 federally insured bodies have failed and it is apprehended that many more will join the ranks because of the pressure of falling real estate market, increasing foreclosures and credit freeze. This may lead to institutional mergers.

FDIC had originally estimated the losses to be $40 billion. This was inclusive of $8.9 billion loss from the collapse of IndyMac. Bovenzi clarified, “That estimate is low. Our losses over an extended period will be higher.”

Since the estimate was last calculated three months of further data collected from the banking industry has been added, together with worsening of the economic scene. This indicates more losses. The FDIC has increased insurance premiums paid by the banks and thrifts to complement its funds that are now standing at $34.6 billion. This is considerably below the level that had been set by Congress. Since 2003 this is the lowest level.

In October 2008 FDIC set up a programme to give guarantee $1.4 trillion of USA bank’s debts for over three years. This was a part of the financial rescue plan initiated by the government. Due to mistrust the bank-to-bank lending had nearly come to a halt. The measure was supposed to thaw this coldness and encourage loan taking and giving between banks. The FDIC would guarantee the new debt if the borrowing bank defaulted. There are 8,500 federally insured banks and thrifts. Of these 171 are on the troubled list of FDIC.