FDIC's belt & suspenders

Northwestern Financial Review, Aug 1-Aug 14, 2004 by Bengtson, Tom

The Federal Deposit Insurance Corporation is making important changes to the way it figures its reserve for projected future losses. I have written in the past that the FDIC is over-reserving; in fact, I don't believe the FDIC should have such a reserve at all. People don't usually wear a belt and suspenders; why do we need an insurance fund, and then another fund behind that? If insurers do a good job assessing risk, they should only need an insurance fund.

Because the reserve amount does not count toward the balance of the Bank Insurance Fund, it is in every banker's best interest to keep the reserve balance as low as possible. At the end of March, the BIF had $34.2 billion, with an additional $156 million in the reserve for projected future losses. One-hundred-and-fifty-six million dollars is a lot of money, but it is substantially less than a year earlier when the reserve balance was $872 million. (The BIF had $32.4 billion at the time.)

Following up on advice it got from a consulting firm in spring of 2003, the FDIC has come up with a better way to determine how much money should go into the reserve. The $716 million difference went into the BIF, and now can be counted toward the 1.25 percent insurance floor prescribed by law. Keep in mind that if the fund dips below the 1.25 percent level, bankers will have to pay premiums into the fund again. The ratio currently is 1.31 percent.

Government agencies always seem to want reserve funds. It is so much easier for a government agency to over-assess than it is for it to determine the correct amount in the first place. If there are questions about what the correct amount is, the benefit of the doubt should go to the person paying the bill. There is a real cost to over-reserving, as it takes money out of communities. The FDIC is doing the right thing be reducing its reserve for projected losses. It could do even more by getting rid of the reserve all together.

By Tom Bengtson, Publisher