FDIC Insurance Fund Falls to Negative Balance

The Deposit Insurance Fund (DIF) balance decreased by $18.6 billion (180%) to negative $8.2 billion during the third quarter, the FDIC said in its Third Quarter 2009 CFO Report to the Board. The decrease was primarily due to a $21.7 billion increase in the provision for insurance losses, which was partially offset by a $3 billion increase in assessment revenue.

Deposits at FDIC-insured institutions are insured up to at least $250,000 per depositor through Dec. 31, 2013. The DIF is the fund through which depositor’s claims are paid if an insured institution fails.

As part of its plan to restore the reserve ratio (DIF fund balance as a percent of insured deposits) to 1.15% within eight years and to meet the DIF’s liquidity needs, the FDIC in November approved a rule requiring all insured institutions to prepay, on Dec. 30, 2009, their estimated risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The FDIC estimates that the prepaid assessments will total approximately $45 billion. This will significantly enhance the DIF’s liquidity but will not initially affect the fund balance. The assessments also will not immediately affect bank earnings. Banks will recognize a portion of the prepaid assessments at the end of each quarter when they normally would have come due.

The FDIC projects the DIF will remain negative over the next several years because approximately $75 billion in failure costs are expected to be incurred from the end of the third quarter of 2009 through the end of 2013.

During the third quarter of 2009, the FDIC also reported it was named receiver for 50 failed institutions. The combined assets of these institutions was approximately $70.2 billion with an estimated loss of $14.3 billion. The corporate cash outlay during the third quarter for these failures was $16.5 billion. Overall for 2009, 140 insured institutions had failed as of Dec. 18.