Federal Deposit Insurance Corporation
Created in 1933, the Federal Deposit Insurance Corporation has long had the power to take over failed banks. Now it is preparing to perform a similar role for giant, global financial institutions that are not traditional commercial banks.
Financed by banks and backed by the United States, the F.D.I.C. was created to prevent the kinds of bank runs seen during the Great Depression by insuring bank deposits. In its first decade, it was busy closing failed banks and paying off insured depositors. For years following World War II, the F.D.I.C. had a quieter role as the banking industry was considered relatively stable.
In what became known as the Savings and Loan crisis of the late 1980s, hundreds of S&L's made a torrent of bad loans, ending in a government takeover of those institutions and bailout costing more than $200 billion. By 1991, the F.D.I.C. had a negative fund balance and had to borrow from the Treasury.
As the economy recovered, from 1996 to 2006 bank failures were so rare that the F.D.I.C. waived most of the premiums it normally would have collected to insure bank deposits.
But the collapse of the housing boom in 2008 and the huge bank losses that followed have put the agency under greater strains than it has faced in years. In September 2009, it estimated that the deposit insurance fund could pay out $100 billion over the next four years, far more than the agency has in its reserve fund. Rather than tap its credit line with the Treasury, agency officials asked the banking industry to make up the difference by prepaying premiums on the insurance.
The financial regulatory reform bill passed in July 2010 significantly expanded the agency's powers, allowing it to seize and dismantle large, failing financial institutions so that taxpayers are not on the hook, as they were in the 2008 financial crisis.
The Dodd-Frank overhaul of Wall Street regulations designates the F.D.I.C. as the agency to be appointed as a receiver to bring about the “orderly liquidation” of huge financial companies as an alternative to bankruptcy court. The new power, known as resolution authority, is intended to avoid a recurrence of an event like the September 2008 bankruptcy of Lehman Brothers, which plunged financial markets around the world into turmoil and quickly led to several government-financed bailouts.
Background
In 1983, the Federal Deposit Insurance Corporation celebrated its 50th anniversary by issuing a history that began with this passage:
" 'On March 3 banking operations in the United States ceased. To review at this time the causes of this failure of our banking system is unnecessary. Suffice it to say that the government has been compelled to step in for the protection of depositors and the business of the nation.'
"As President Franklin D. Roosevelt spoke these words to Congress on March 9, 1933, the nation's troubled banking system lay dormant. More than 9,000 banks had ceased operations between the stock market crash in October 1929 and the banking holiday in March 1933. The economy was in the midst of the worst economic depression in modern history.
"Out of the ruins, birth was given to the FDIC three months later when the President signed the Banking Act of 1933. Opposition to the measure had earlier been voiced by the President, the Chairman of the Senate Banking Committee and the American Bankers Association. They believed a system of deposit insurance would be unduly expensive and would unfairly subsidize poorly managed banks. Public opinion, however, was squarely behind a federal depositor protection plan.
"By any standard, deposit insurance was an immediate success in restoring stability to the system. The bank failure rate dropped precipitously, with only nine insured banks failing during 1934. During the 30-year period beginning with World War II,the workings of the economy and the conservative behavior of bank regulators and the banking industry created a situation that posed few risks to the financial system, and the importance of deposit insurance in maintaining stability declined. Indeed, Wright Patman, the then-Chairman of the House banking committee, argued in a speech in 1963 that there were too few bank failures - that we had moved too far in the direction of bank safety. ''
Savings and Loan Crisis
In the late 1980s, hundreds of Savings and Loan Associations made bad loans, ending in a government takeover and bailout that ultimately cost taxpayers over $120 billion. The savings and loan crisis led to a reshaping of the F.D.I.C. and new attention on the importance of tight regulation of banks holding federally insured deposits.
Changes in the marketplace and in the legal landscape kept banking in turmoil, but few banks were failing. The collapse of the housing market and the credit crunch that followed in 2007 raised new worries, however, and by the spring of 2008 the F.D.I.C. was warning that the banking sector was facing alarming new strains.
Global Credit Crisis
In July 2008 Indymac, a California-based bank, was seized by the agency as its mortgage-related losses mounted. A rash of bank failures followed, causing the F.D.I.C.'s deposit fund to drop to its lowest point in years.
Federal regulators said on Sept. 29, 2009, that they expect bank failures to cost the deposit insurance fund about $100 billion in the next four years, much higher than the earlier estimate.
They also announced that the fund, which had more than $50 billion before the crisis began, had been so battered by bank collapses that it would fall into deficit by the first week of October.
After slipping into the red, the F.D.I.C. moved swiftly to refill its coffers. The agency imposed a special assessment on banks that gave it an immediate $5.6 billion cash infusion. That assessment was in addition to the ordinary payments that banks make to the F.D.I.C. fund.
The F.D.I.C. also ordered banks to prepay quarterly assessments that would have otherwise been due through 2012. That provided an additional $46 billion to restore the fund to normal.
In the spring of 2010, with some troubled banks being taken over by private investors, rather than closed by the government, the pressure on the F.D.I.C. was beginning to ease.
The news was not all good, though. Seventy-two banks had already collapsed in 2010, and banking analysts worried that more failures will follow, particularly among small and midsize lenders exposed to troubled commercial real estate.
