FDIC Looks to Banks for Bailout

Here’s a twist. The government, instead of pouring money into banks, may borrow from them to replenish the Federal Deposit Insurance Corporation’s depleted fund for protecting depositors in failed institutions.

The New York Times, citing unnamed officials, reported Tuesday one scheme to replenish the fund that has been drawn down by bank failures this year is to go to healthy banks and borrow some cash.

Update: The Wall Street Journal reports Wednesday that the borrowing plan is being downplayed by its unnamed sources. "It is an option, although it is not under serious consideration," a spokesman told the Journal. Instead, the Journal reports, officials are considering a plan under which it would require banks to prepay required fees in order to replenish the fund.

Bankers like the borrowing plan, because it would sidestep a special assessment of $5 to $10 billion that the FDIC could levy on all banks to replenish the fund. Some bankers have worried that such a step would cut into profits and could even push some more vulnerable banks into receivership.

The FDIC could also draw on a $100 billion line of credit from the U.S. Treasury. But the Times reports the FDIC is reluctant to go to the Treasury for the money.

“It’s a nice irony,” Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company, told the Times. “Like so much of this crisis, this is an issue that involves the least worst options.”

The FDIC’s fund has dwindled as it has had to pay off depositors at 94 failed banks so far this year. Though it has levied a special assessment on banks once this year, the fund’s cash balance is down to about $10 billion, with another $32 billion set aside for failures officials expect to occur in coming months.

Banks have been failing at a rate of about five a week for months. And experts expect that trend to continue for the near future, as bad housing construction and commercial loans hit community and regional institutions.

One big bank failure could wipe out the FDIC fund.

But there is some appeal to going to healthy banks for a bailout of the FDIC.

“Borrowing from healthy banks, instead of the Treasury, has the advantage of keeping this in the family,” Karen M. Thomas, executive vice president of government relations at the trade group Independent Community Bankers of America, told the Times. “It is much better for perceptions than having the fund borrow from somewhere else.”

Banks that lend to the FDIC would receive bonds at an interest rate set by the Treasury Secretary. Ultimately, they would be paid off by the rest of the banking industry.