Can the FDIC cope with US banking failures?

| July 14, 2008 | 0 Comments

With the collapse of Indymac, the FDIC was forced to allocate anywhere between $4-8 billion in assets to take over the company.

Who are the FDIC?

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

In other words, they are like a combination of the FSA and the Treasury in one - they try to look after the money belonging to ordinary Americans. And that means when a bank looks like it’s going to go bust, they step in to protect people’s savings.

In a country with over 7500 regional and national banks, that can be quite a challenge - that’s why the FDIC has over $50 billion in assets to look after the nation’s savings health.

And the collapse of Indymac took a big chunk of that - at a time when analysts are predicting another 150 banks could collapse over the near term.

The FDIC has already had to recover assets from 23 banks since the year 2000, and the collapse of Indymac took a big chunk of their cash reserves.

The trouble is, once the FDIC starts to price up Indymac’s assets, a domino effect could then hit the US banking sector further:

When the FDIC starts to sell off IndyMac’s assets, it thereby be defining what the market price is for those items, because it will be finding out what an actual sale price is on them. That means that every other bank or financial institution that has had similar assets tucked away off their balance sheets … suddenly has to bring those assets back onto their balance sheets, and do so at their new fire sale price.

The Charlestown covers an almost amusing story of how the FDIC have to covertly move in on a bank.

While the questions remain of which banks will be next, and what the impact will be on the rest of the US banking sector, it’s also worth asking how badly this will affect the finances of the FDIC.

After all, if the FDIC are the savings of America’s last bastion of protection, and the FDIC finds their own funds drying up, the calls from Congress to give credit to Wall Street as well as Fannie Mae and Freddie Mac will have been nothing but opening acts in a much bigger drama.

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