FDIC: The Federal Deposit Insurance Corporation has been one of the more effective U.S. financial regulators. Yet the agency has a problem -- its fund that insures deposits of up to US$250,000 needs cash. It had shrunk to US$10.4-billion at the end of June. One possibility being considered is to top it up by borrowing from stronger banks. While that may sound politically more palatable than begging from taxpayers, it's a daft idea. The FDIC shouldn't be beholden to the companies it regulates.
It's understandable that the agency is examining all means of replenishing the fund. It's already levied an emergency fee on deposit-taking institutions. Slapping another on would increase the strain on tottering banks -- who might then land in the FDIC's lap.
Of course, the FDIC could go to the Treasury. It has a US$100-billion line of credit it can tap and plenty more available should the agency just ask. After all, deposit insurance prevents damaging bank runs, and the FDIC has never cost taxpayers a dime. But doing so might be perceived as a loss of face -- which is important in Washington's ongoing turf wars. It might also lead to more intrusions from Congress.
Hence the idea of borrowing from stronger banks. The FDIC is already permitted to do so under law. And healthy banks should be perfectly willing to lend given the explicit government guarantee on any loans. Sure, it is a bit convoluted that firms which just recently issued debt with a FDIC guarantee may now be called upon to fund the agency. But the scheme's key flaw is far simpler.
The agency has three roles. Not only does it insure deposits, but it also ensures the soundness of financial institutions and winds up insolvent ones. And logic and history (notably the poor stewardship of the Office of Thrift Supervision, which called its regulated entities "clients") suggests bank examiners shouldn't be financially dependent on firms they oversee. It is an open invitation for regulatory sympathy at best and outright capture at worst.
To be fair, the chances of the FDIC adopting this proposal seem small. It will probably resort to other, more traditional measures such as assessments and borrowing from the Treasury. These may be politically uncomfortable, but the FDIC has a reputation for taking difficult, yet correct measures. To retain this shine, it should ditch any scheme of borrowing from banks.
Read more: http://www.financialpost.com/opinion/breaking-views/story.html?id=2020808#ixzz0RtjKuvN8
Tuesday, 22 September 2009
FDIC may borrow from banks to top up fund Read more: http://www.financialpost.com/opinion/breaking-views/story.html?id=2020808#ixzz0RtjHHgxv
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