US bank insurance fund may need treasury loan

NEW YORK: The guarantee fund standing behind America’s high-street bank deposits has seen its ‘problem list’ grow to 416 troubled financial institutions, sparking concern that it may have to borrow money from the US treasury to safeguard customers’ accounts.

The Federal Deposit Insurance Corporation (FDIC), which guarantees $4.5 trillion in US bank accounts, revealed yesterday that the balance in its insurance fund fell from $13 billion in March to $10.4 billion in June as new banks collapsed each week.

Warning that bad debts and home repossessions continue

to rise, the FDIC said cash-strapped banks were increasing in

number. Its so-called watch list of struggling institutions grew from 305 to 416 during the second quarter to reach its highest point since 1994, when America’s savings and loans crisis was at a peak.

Sheila Bair, the FDIC’s chairman, reassured the public that their savings were safe: “The FDIC was created specifically for times such as these. No matter how challenging the environment, it has ample resources to continue protecting depositors, as we have for the last 75 years.” But analysts are worried that the FDIC, which is funded by a regular surcharge on the banking industry, could run short of its own resources, which would force it to tap a $500 billion line of credit available from the US treasury. The FDIC has not required help from taxpayers for two decades and such a move could damage the fragile recovery in confidence surrounding the financial industry.

“Borrowing from the treasury would send a signal about the health of the banking industry,” Nancy Bush, an analyst at NAB Research, said. “They, the Federal Reserve and the treasury are all concerned about systemic fragility.” In the year to date, a total of 81 financially challenged US banks have been seized by regulators. Such action is usually taken on Friday evenings, giving the FDIC time to find another bank to take on deposits and allowing branches to be reopened the following Monday morning. The most recent failures took place a week ago, when four banks — Guaranty Bank in Texas, CapitalSouth Bank in Alabama and two institutions in Georgia — were shut down by the authorities.

The worst banking crisis since the Great Depression of the 1930s has prompted the FDIC to tap banks for an emergency increase in contributions, and it recently raised $5.6 billion to bolster its coffers.