Is FDIC Really Backed By The Government?

The Abilene Reporter News has an interesting article in today's local business section (thanks to the Internet its  "local" to me in Stamford, CT) which discusses the impending rate increase by the Federal Deposit Insurance Corporation (FDIC) and gives an "C-Suite in the trenches" view of what is going on at the bank level and the impact of bank impairments and failures on other banks.

I had had more than one client state to me that the "FDIC is backed by the government".  Have you heard this?  Is this what you understand to be the facts? Please read on.

"The FDIC gets no money from the government.. It’s a fund we have built totally on our own. The money comes from the banks. We are the ones who fund the FDIC. When a bank fails, no tax dollars are used, and no insured depositor has ever lost money.”  Scott Dueser Chairman and CEO of  First Financial Bankshares

The FDIC is financed by more than 8,300 banks. These banks pay insurance premiums to the FDIC to guarantee customer deposits.  There is also a $30B line of credit with Treasury which many, including FDIC chairwoman Sheila Bair, have expressed should be increased. A line of credit, which can provide relief for short term financial stress is a loan.  Backed by a "government line of credit" is a heck of alot different than "backed by the government".

The amount of FDIC premiums for each bank is based on its balance of insured deposits and the degree of risk the institution poses to the fund. A calculation is made each quarter and an assessment is made. According to the above cited article Ben Scott CEO of Coleman County State Bank says “They take it out of your account. They don’t even send you a bill. They just grab it.”

The temporary increase in the amount of insurance from $100,000 to $250,000 through 12/31/2009 gives depositors more confidence, yet there is a correlating increase in stress on the system and ultimately means a greater assessment on the solvent banks in the event of failures. The article says for example Dueser's bank's FDIC assessment 2008 was $400,000 and could be $9,000,000 in 2009.

"The rate increases mean the total deposit insurance fees could be “nearly 10 times more costly for some banks than in the prior year". Meredith B. Allen Jr., senior vice president of Vining Sparks

What of the banks on or close to the bubble?

FDIC website