416 and Rising

416 and Rising
The Federal Deposit Insurance Corporation recently released the aggregate number of troubled banks. The new total is 416, the highest level in 15 years.

Not very comforting news.

The problem is growing instead of shrinking. Last week, the regulators closed five banks. These closures are likely to cost the FDIC’s deposit insurance fund just under USD$400 million. There will be more closures this weekend I think.

The costs to the FDIC insurance fund should concern you. The fund, by law, has to maintain certain capital levels. Banks provide all of the money in the insurance fund. The money the banks pay in comes from their profits.

If any insurance company has a bad string of losses or if you have a couple of automobile accidents, the premiums will go up to cover the losses. The policyholders will pay the increased premiums.

The FDIC will increase its premiums, if you will, that banks have to pay. Unlike consumers who can shop around for the best deal on insurance or decide to have the minimum coverage, banks have no choice. They have to have FDIC insurance to stay in business.

Period, end of discussion, send your check to the FDIC on time.

Banks then will pass this added cost of doing business on to you and me, gentle readers, in the form of higher interest rates and higher fees and elimination of free and low costs services and reduced rates on deposits.

If I were a betting man, I would bet that probably close to 400 of those troubled institutions will fail. Failure is defined as ceasing to be an independent financial institution. This possible number of failures doesn’t include other banks that haven’t reached the troubled banks list yet.

How long could a regime of higher interest and fees last?

It all depends on how long the FDIC decides to take to rebuild the insurance fund capital base. My guess is that it might last as long as five years. But, after five years, customers will be so used to the higher rates and fees there will be no incentive to reduce them.

I think I’ll stop for now. I don’t want to scare you that much; it is still too soon for Halloween.


Be well and stay happy.