The FDIC is beefing up its staff in anticipation of more bank failures, reports The Dallas Morning News today. This doesn’t bode well for the insurer, says in David Newman in The Sovereign Society. The problem is the FDIC is running our of cash to fulfill its obligation to insure deposits…

The FDIC levies a fee on all U.S. Banks. These are the reserves that insure your deposits. But here’s the problem: The reserves are running low this year. As of today, the FDIC’s reserves reported it had US$45.2 billion of reserves covering 1.01% of all deposits. This is considered historically low.

The failure of just one bank last month – IndyMac (OTC:IDMC) – is going to wipe out 10-15% of all reserves. That’s just one bank (let’s not forget that the S&L bailout cost us over US$160 billion). Consider that nine have already failed this year. In fact, I see on the FDIC website another bank failed on Friday.

When the reserves that insure your bank deposits drop 1.15%, then by mandate the FDIC must come up with an action plan. If you do the math on this, you’ll find we’re already there. But what “actions” can they take? They don’t have that many choices.

Remember they get their reserves by levying a fee on their member banks. That can be a vicious cycle. Let me explain…

Congress gave the FDIC the mandate to replenish their reserves by charging higher premiums on their members. The current fee that most banks pay is five cents for every US$100 of insured deposits. But high-risk banks now pay up to 43 cents to insure that same US$100.

That high-priced insurance is killing them. Especially since FDIC-insured lenders reported a net income of $4.96 billion this quarter, down 87 percent from $36.8 billion in the same quarter of last year. If the banks are called to increase their cost for insurance the money has to come from somewhere.

So here’s the problem: The FDIC needs more cash, but it comes from the banks. Right now, the banks need all their funds so they can make loans and clean up their balance sheets so they can stay in business. But the FDIC has to appear rock-solid, which means they need more than enough cash to cover all the banks.

The FDIC can’t let their reserves fall much lower. FDIC Chairman Sheila Blair said yesterday that they may need to borrow money from the Treasury due to “short-term liquidity issues”, but this is just a temporary fix.

The value of assets belonging to lenders on the ‘problem list’ has tripled to US$78.3 billion in the last quarter alone. That’s roughly twice the amount that the FDIC could currently cover. They’re going to have to raise fees and the inevitable outcome will be more bank failures.

This is a real mess without an easy solution. It seems only the strong will survive. So make sure your money is secure at one of the stronger banks. You can get more information about your bank here.

Source: Who Really ‘Insures’ the FDIC?