FDIC and Causes of FDIC losses in banking failures

The FDIC or the Federal Insurance Deposit Corporation is the federal agency that is tasked to preserve and to promote the confidence of the general public on the financial system of the United States. Comes with this is the duty to insure that the deposits in the thrift banks and bank institutions in the United States for at least one hundred US dollars. Also, the FDIC is tasked to identify, to monitor, to address the risks to the insurance funds and to limit whatever effect a failure on a financial institution may cause to the entire economy. This federal institution was established sometime in 1933 due to the many bank failures that happened in the past decade before its establishment. Accordingly, due to the creation of the FDIC, the United States government was able to ensure that no depositor would lose a cent of the fund that was insured. As an institution, the FDIC is not supported by any appropriation from the National Congress but is able to source out funds through the premiums that the banks pay to cover for the insurance coverage for the deposit. The FDIC has over forty nine billion US dollars of insurance fund and it insures over three trillion US dollars of deposits from US thrift banks and bank institutions. To make it clear, the FDIC can only insure deposit accounts and no other.

In a study "FDIC losses in bank failures: has FDICIA made a difference?", the causes for the losses for the FDIC and the FDIC Improvement Act was extensively discussed. According to the study, the banks are considered to have failed as a financial institution and has to be placed under receivership when the value of the assets of the bank goes below the value of the deposits of the bank and other debt such that the net worth or the value of the bank's capital is already negative. Oftentimes, the losses suffered by these banks are so huge that the stockholders of these banks are unable to absorb the losses. Just like most stockholders, the creditors and the insurers of these banking institutions like the Federal Deposit Insurance Corporation can also suffer the losses brought about by these bank failures to the extent of the insured deposits. And although it was previously mentioned that the FDIC does not receive funds from the Federal government, as a federal institution, whenever the bank failures causes the FDIC severe losses as to exceed the reserves of the corporation and revenues that it can collect, the government has to pay for the losses using the money of the taxpayers.

According to the author of the study, George Kaufman, in the United States, most of the chartered banks are not placed under receivership by the order of federal bankruptcy courts and are not also subject to the bankruptcy code but are instead placed under conservatorship. The author said that the loss rate of the Federal Deposit Insurance Corporation is attributed to a number of factors such as the timeliness of the placing of the bank under conservatorship or under receivership once its capital value reaches zero and before it gets negative. Also, another factor that determines the loss rate is the ability of the federal corporation to sell the assets of the bank or the bank itself at its highest face value. Among the largest losses suffered by the FDIC was in the 1980s when a number of Savings and Loans and bank failures plagued the banking system and in order to recover from the tremendous loss, the federal government has to inject over one hundred fifty billion US dollars from the taxpayers funds.

In another study by Kaufman on Bank Failures, System Risk, and Regulation, he said that while the failures and the risks are systemic, these can be minimized provided that macroeconomic policies are put in place to make the banks more stable despite its vulnerability to failures. This can be done through a back up prudential policy by introducing in the banking system the structured early intervention and resolution or the SEIR system which would reduce if not eliminates the bank failures.

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