WASHINGTON — The Deposit Insurance Fund has the resources to cover the cost of expected bank and thrift failures — without tapping other government liquidity sources, Chairman Sheila Bair said Thursday.
"We're confident that our industry-funded reserves will be more than adequate to cover any losses caused by more bank failures," she said in prepared remarks for a speech to the Florida Bankers Association.
The FDIC revealed last month that the costs of recent failures, including the collapse of IndyMac Bancorp Inc. in July, had drained the fund's reserves by 14% last quarter, to $45 billion, or just 1.01% of insured deposits. By law, the agency must raise premiums whenever the ratio falls below 1.15%.
The drop confirmed that the industry will face significantly higher premiums next year, but it also prompted more questions about the adequacy of the reserves.
The FDIC has other funding outlets at its disposal. They include a $30 billion Treasury Department line of credit, which has never been used. The agency also can borrow from the Treasury's Federal Financing Bank for short-term needs, as it did during the savings and loan crisis.
Though she did not rule out these options, Ms. Bair said they are not likely to be necessary. She anticipates that new premiums will be more than sufficient to restore reserves.
The current fund level "is not a static number," she said, and new premiums set to be unveiled next month will strengthen the system.
"Because we have the power to raise premiums to cover our losses, in effect, the capital of the entire banking industry is available to support the fund," she said. "All told, well-capitalized banks had $1.3 trillion in total capital at June 30. That's $266 billion above the threshold for well-capitalized status. This is a very strong foundation."
If circumstances deteriorated significantly and the FDIC required more liquidity, it would use the Federal Financing Bank first, Ms. Bair said.
"We don't expect to have to use" the $30 billion Treasury line, she said, and future circumstances will help decide whether her agency needs extra short-term funds. "If need be, we can potentially raise very large sums of working capital through the Federal Financing Bank, which would be paid back as the FDIC liquidates assets. Our need to draw on Treasury's Federal Financing Bank will depend primarily on the pace of bank failures and how fast we sell failed bank assets."
She noted that the FDIC used the Federal Financing Bank in the early 1990s. "These short-term borrowings were repaid with interest within two years," she said.
The Treasury backstop, however, is important to maintain depositor confidence. "The public should understand that we have multiple tools at our disposal to maintain our insurance guarantee," she said.
Speaking for the first time since releasing second-quarter industry earnings that she called "dismal," Ms. Bair also urged bankers to follow recent agency guidance on improving liquidity management, and she reiterated the agency's intent to shift a bigger premium burden to institutions with riskier balance sheets. "It seems only fair that we reward behavior that reduces our costs," she said. "And higher-risk institutions can reduce their premiums by changing their risk profiles."
After years of low insurance losses, the Deposit Insurance Fund took a big hit July 11 when IndyMac Bank of Pasadena, Calif., failed. The agency has estimated that the failure will cost as much as $8.9 billion. That began a stretch of six failures in seven weeks, ending when the $1.1 billion-asset Integrity Bank in Alpharetta, Ga., failed Aug. 29.