FDIC Could Be Insolvent?

Chairman of the Federal Deposit Insurance Corporation (FDIC), Sheila Bair, said that the FDIC could be insolvent this year.  In a letter to the banking industry, Bair wrote that the FDIC would raise fees in an attempt to prevent insolvency.  The government agency offers deposit insurance on bank accounts up to $250,000.  

Last year 25 banks failed.  That drove FDIC available funds from $34.6 billion down to $18.9 billion.  Failures over the next year could drive the program into insolvency.

Sadly, the agency might be causing the very problems it’s trying to fix.  FDIC insurance on bank deposits change incentives for bank shoppers.  Rather than carefully selecting a bank that will remain solvent through skilled management of funds, consumers search for banks protected by FDIC insurance.  The presence of the insurance likely drove many consumers to wantonly place their money in banks doomed to failure that they could have anticipated by shopping more carefully.  The guarantee from the FDIC contributed to the threat of its own insolvency.