Wednesday, November 18, 2009

Big, Bigger, Biggest

We've all heard that the biggest banks are too big to fail. If that is true, does it mean that the littlest and mid-sized banks can and must fail?

The logic bothers me.

The FDIC, the government agency that guarantees you won’t lose your money in a bank failure, recently topped 100 bank closures with another 225 banks on their watch list. The Federal Deposit Insurance Corp. (FDIC) has been heavily depleted with the closures already on record.

What happens if the FDIC runs out of money? How much do they have in reserves?

If regional, small and mid-sized banks begin to fail because commercial borrowers can't make their payments or the number of bank defaults increase, will the FDIC be able to continue without either borrowing from the US Treasury or charging higher fees?

In the 1980s during the savings and loan crisis, the FDIC was forced to borrow $15 Billion from the US Treasury and then had to repay it with interest. Although we aren’t close to the number of banks closed in the 1980s savings and loan crisis, it is no secret that the FDIC is stressed and will become more so in 2010.

The results of FDIC actions in the next 12 months will have far reaching effects on our economy and recovery.