Foreclosures and the Effect on FDIC

November 6th, 2008 | Tags: Foreclosures

Foreclosures have had its effect on the federal Deposit Insurance Corp. (FDIC). The 17th victim in a chain of failures of federally insured banks this year was Freedom Bank, Bradenton, Fla. The assets of this bank were $287 million with deposits worth $254. FDIC has been appointed receiver of the bank and will insure the deposits. The Fifth Third Bank of Grand Rapids, Michigan, will assume the deposits of Freedom Bank. Of the bank’s assets, about $35 million will be acquired by Fifth Third Bank which will retain the remaining assets of $251 million for sale. The estimated cost of the whole process for FDIC will be about $80 million to $104 million.

Under the new financial rescue law of October, upto $250,000 of regular deposit accounts are insured while $250,000 continues to be the limit on individual retirement accounts.

The 17 bank failures till October this year are more than the total number of bank failures in the past five years combined. Depreciating home prices, more and more mortgage foreclosures, stricter credit has affected banks.

Among the giants, which fell to foreclosures this year, were Washington Mutual Inc based in Seattle and IndyMac Bank based in Pasadena, California.

The estimated loss to deposit insurance fund through 2013, according to FDIC, will be $40 billion. FDIC’s funds are now $45.2 billion which is less than the minimum target level decided by Congress. This is the lowest level since 2003. To replenish its funds, FDIC is increasing banks’ insurance premiums.

To ease the bank-to-bank lending logjam FDIC plans to guarantee about $2 trillion in debt and deposit accounts of US banks.

In view of the foreclosure situation, FDIC’s temporary guarantees are expected to be tapped by more than half of approximately 3,500 federally insured banks. FDIC will provide about $1.4 trillion in insurance for more than three years. This will be for inter-bank loans and will guarantee the new debt incase the issuing bank fails or there is a bankruptcy charge against its holding company.

FDIC will also guarantee “Transaction” accounts, which are non-interest-bearing. The prevailing insurance limit of $250,000 on these accounts will be removed. The deposit accounts are often used by businesses to process their payrolls and other transactions. This change can add upto $400 billion to $500 billion roughly in FDIC-backed deposits.

With the foreclosure crisis, about 117 FDIC-insured banks, out of 8,500, were said to be in trouble in the second quarter as against 27 in the first quarter. This is the highest number in 5 years.